OPINION1

CHRISTOPHER S. SONTCHI, Bankruptcy Judge.

Before this Court is the Highland Capital Management, L.P. ("HCMLP") and the Highland Institutional Lenders' (collectively referred to herein, and inclusive of HCMLP, "Highland") motion for summary judgment (the "Motion") as to a complaint ("Complaint") filed by the Official Committee of Unsecured Creditors (the "Committee").2 For the reasons set forth below, the Court denies the motion for summary judgment for all but one count due to the existence of triable issues of fact surrounding the allegations in the Complaint. The Court grants summary judgment with regard to the remaining count. Accordingly, the Court will grant the Motion, in part, and deny the Motion, in part.

JURISDICTION

This Court has jurisdiction over this matter 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)(2)(A), (K) and (O).

STATEMENT OF FACTS

A. April 1998-January 2005: No Involvement by Highland Defendants

On April 8, 1998, Millennium Digital Media Capital, LLC (n/k/a Broadstripe Capital, LLC) ("Capital") was formed to acquire, develop and operate cable television and related telecommunications properties. Thereafter, Capital acquired cable television and related telecommunications properties in three regions: Maryland (the "Mid-Atlantic System"); Michigan (the "Central System"); and Washington and Oregon (the "Northwest System" and collectively, the "Systems"). The Systems are operated by Broadstripe, LLC (f/k/a Millennium Digital Media Systems, LLC), the Debtors' principal operating company.

To fund the early System acquisitions, Capital entered into a Note Purchase Agreement, dated as of October 5, 1999 (as amended, supplemented or otherwise modified, the "IRN Purchase Agreement"), whereby it borrowed $70 million in the form of IRNs due to fully mature on March 31, 2009.3

In addition, Broadstripe (OpCo) entered into a $250 million loan facility dated December 29, 2000 (as amended, supplemented or otherwise modified, the "Original Loan Agreement" and together with all supporting documents, the "Original Loan Facility"), comprised of a secured term loan and a secured revolver. The initial lenders under the loan facility were Fleet National Bank, Credit Lyonnais New York Branch, First Union National Bank, Canadian Imperial Bank of Commerce, and Bank of Montreal. The administrative agent was Fleet National Bank. The Original Loan Facility granted the lenders thereunder first priority liens on substantially all of Broadstripe's assets.

B. February 2005: Highland Enters the Picture

The Highland Lenders' first purchase of Broadstripe debt occurred on the secondary market in February 2005. By this time, Broadstripe was already indebted (i) at Opco to the existing secured lenders under the Original Loan Facility in an approximate amount of $196 million and (ii) at Capital to the IRN holders in an approximate accreted amount of $175 million.

At this time, Broadstripe was also on the verge of a covenant default under the Original Loan Facility. As a result, on March 31, 2005, Broadstripe's existing secured lenders executed an amendment to the Original Loan Facility (the "Fifth Amendment") providing covenant relief, shortening the Original Loan Facility's maturity date from October 30, 2008 to June 30, 2006 and requiring Broadstripe to sell the Systems to repay the debt owing to them regardless of any negative consequences of a sale to Broadstripe or the IRN holders. As of the date of the Fifth Amendment, the Highland Lenders were nowhere close to being "Majority Lenders" under the Fifth Amendment.

The Highland Lenders held only de minimis equity,4 and no seats on the Management Committee of Broadstripe.

C. December 2005: The Proposed Wave Sale

As a consequence of the Fifth Amendment, Broadstripe retained Daniels & Associates to market the company's Systems for sale. On December 15, 2005, Broadstripe and WaveDivision Holdings, LLC ("Wave") signed a letter of intent for Wave to acquire two of Broadstripe's three Systems (i.e., the Northwest and Central Systems) for $157 million (the "Wave Sale").

The Wave Sale was expressly conditioned upon and subject to the consent of (i) the Original Loan Facility lenders and (ii) the IRN holders, provided that the consent of the IRN holders would be deemed to have been obtained if Broadstripe and Wave reasonably concluded that such consent was not required.

The $157 million in proceeds from the proposed Wave Sale,5 combined with expected proceeds of between $87.7 million and $125 million (based on indications of interest provided to Daniels & Associates) from a future sale of the Mid-Atlantic system (collectively, the "Expected Sale Proceeds"), were expected to be sufficient to repay in full the approximately $196 million in senior loans outstanding at the OpCo level under the Original Facility. Based on these values and Broadstripe's audited financial statements, OpCo was clearly solvent at this time. Unfortunately, the remaining sale proceeds would have been insufficient to pay off the approximately $211 million in accreted IRN obligations at Capital existing as of December 31, 2005, wiping out between an estimated $130 million and $169 million in accreted IRN obligations.

D. Trimaran Mobilizes the IRNs

At the time of the Wave bid, Trimaran/Caravelle ("Trimaran")6 was the largest IRN holder (holding approximately 43% of the IRNs). As of this time, Trimaran's related parties also held equity in Broadstripe and two of the six seats on Broadstripe's Management Committee.

Trimaran held no Original Loan Facility debt however, and so with its large IRN holdings, it stood to lose the most from the Wave Sale.

Therefore, commencing in December 2005, Trimaran mobilized the IRN holders to determine whether or not to consent to the Wave Sale. On December 14, 2005, at the request of William Phoenix, a Trimaran designee, Darren Fredette ("Fredette") (also of Trimaran) contacted Broadstripe's CEO, Kelvin Westbrook ("Westbrook"), to coordinate a presentation by Broadstripe to the IRN holders to be held at Trimaran's New York office. Fredette instructed Westbrook as to precisely what topics Trimaran wanted included in the presentation and previewed and commented on drafts of it. The IRN Holders were notified on December 20, 2005 of the meeting arranged by Fredette and Westbrook to be held on January 5, 2006.

The IRN holders in attendance at the January 5 meeting included Fredette (Trimaran), Jay Bloom ("Bloom") (Trimaran), David Walls ("Walls") (Highland Crusader), Ethan Garber (Bear Stearns), Jim Russo (Credit Suisse), Robert Davenport (Cerberus; attended telephonically) and Kelvin Westbrook, Bruce Beard and Tim Valley (each from Broadstripe). Generally, topics covered in Broadstripe's January 5 presentation included (i) the Wave Sale process, (ii) expected proceeds and distribution waterfall for the Wave Sale, (iii) indications of interest for the Mid-Atlantic System and (iv) the financeability of Broadstripe going forward. The IRN holders also questioned the effect of the proposed Wave Sale on their IRN holdings, and suggested that Broadstripe look into financing alternatives to the Wave Sale. As of the January 5, 2006 meeting, the IRN holders' respective holdings were as follows:

-------------------------------------------------
  IRN Holders as of                 Percentage of
   January 5, 2006                   Holdings
-------------------------------------------------
Caravelle Millennium Investment
Corp. (Trimaran)                     42.86%
-------------------------------------------------
Highland Crusader Offshore
Partners, L.P.                       25.03%
-------------------------------------------------
Madeleine, L.L.C. (Cerberus)         20.76%
-------------------------------------------------
Credit Suisse International           7.71%
-------------------------------------------------
Bear Stearns Credit Products Inc.     3.65%
-------------------------------------------------

On February 8, 2006, Broadstripe and Wave executed purchase agreements for the proposed Wave Sale despite Broadstripe's knowledge that the IRN Holders had not yet determined whether to consent.

Following the execution of the Wave purchase agreements, the Highland Lenders began buying up existing senior debt under the Original Loan Facility.

On March 2, 2006, Trimaran informed Broadstripe of its and Highland Crusader's desire to retain Barrier Advisors, LP ("Barrier"), a financial advisory firm, on behalf of the IRN holders to perform financial and operational advisory services to assist in determining whether to support the Wave Sale or an alternative refinancing of the $196 million of existing debt under the Original Loan Facility. On March 3, 2006, Trimaran and Highland Crusader engaged Barrier.

Prior to its engagement, Barrier requested input from its employees as to the names of cable industry experts that Barrier should consider hiring to work on the engagement. Steven Tyler Nau ("Nau"), then a Barrier employee,7 recommended William Shreffler ("Shreffler"), with whom Nau had previously worked at Cebridge Connections. Shreffler had no previous interactions with Highland Capital and no prior contact with any of the Highland portfolio companies. Aside from his recommendation of Shreffler, Nau had no involvement with the Barrier engagement.

Trimaran and Broadstripe also began working to put together a refinancing alternative to the Wave Sale. Trimaran and Broadstripe contacted nine lending sources: Back Bay Capital, GoldenTree Asset Management, Jefferies, CSFB, Bear Stearns, Highland, Black Diamond, Morgan Stanley and Cerberus Capital to solicit proposals to refinance the Original Loan Facility as an alternative to consummating the Wave Sale. Seven of the nine institutions Trimaran and Broadstripe contacted expressed interest in making refinancing proposals. Trimaran acted as a liaison between the potential lenders (including Highland) and Broadstripe. Trimaran also acted as the IRN holder contact point for discussions with Broadstripe's existing senior lenders.

By March 29, 2006, the Highland Lenders constituted "Majority Lenders" under the Original Loan Facility as a result of their purchases of senior debt. The Highland Lenders' aggregate holdings in Broadstripe as of March 29, 2006 are set forth below.

-----------------------------------------------------------------------------------------------
                   Highland Lenders' Holdings as of March 29, 2006
-----------------------------------------------------------------------------------------------
Holding                            Amount                                 Percentage of Debt
-----------------------------------------------------------------------------------------------
Original Loan         Approximately $103 million (out of $196 million)    Approximately 52.6%
Facility (OpCo)       — Institutional Lenders — $12.04 million;
                      — Retail Lenders — $91 million.
-----------------------------------------------------------------------------------------------
IRNs (Capital)        $53.4 million (Highland Crusader) out of            Approximately 25%
                      approximately $212 million in accreted value of
                      IRNs
-----------------------------------------------------------------------------------------------
Equity                de minimis (Highland Crusader)                      pro rata share of
                                                                          membership units (i.e.,
                                                                          less than or equal to
                                                                          2.5%)
-----------------------------------------------------------------------------------------------
Seats on Management   None                                                N/A
Committee
-----------------------------------------------------------------------------------------------

During March and April of 2006, Trimaran continued to act as a liaison between Broadstripe and Highland with respect to the Highland and other refinancing proposals. The Highland financing proposal contemplated refinancing the Original Loan Facility's outstanding $196 million debt into a new $240 million senior secured first lien revolver, senior secured first lien term loan and secured second lien term loan. At all times, Highland's negotiations with Broadstripe were conducted on an arms' length basis.

On April 3, 2006, Barrier issued a draft report concluding that with an improvement in the markets and access to additional funds to grow organically and through acquisition, Broadstripe had a reasonable chance of returning enhanced value to the IRN holders compared with the Wave Sale.8 The IRN holders (including Highland Crusader and Trimaran) thus determined to support a refinancing of Broadstripe's Original Loan Facility rather than the Wave Sale.

On April 7, 2006, Trimaran (holding 43% of the IRNs) and Highland Crusader (holding 25% of the IRNs) exercised their contractual rights under the IRN Purchase Agreement and together notified Broadstripe of their non-consent as IRN holders to the Wave Sale, and indicated their support for the Highland refinancing proposal. Broadstripe voluntarily accepted the Highland proposal, which culminated in a refinancing of the Original Loan Facility on July 28, 2006. On April 21, 2006, the Highland Lenders under the Original Loan Facility exercised their contractual rights as Majority Lenders and directed the agent under the facility not to consent to the Wave Sale. Also on or about July 28, 2006, Broadstripe terminated the Wave Sale.9 Through this date, Highland held no seats on the Management Committee.

E. The July 2006 Refinancing

On July 28, 2006, Broadstripe's Management Committee approved the refinancing of Broadstripe's Original Loan Facility of $196 million into new, syndicated senior secured first and second lien facilities, paid down unsecured obligations (to creditors other than the Highland Lenders) and pumped an additional $33.9 million of liquidity into Broadstripe for working capital and other corporate purposes. The sources, uses and some salient terms of the July 2006 Refinancing facilities are summarized as follows:

-----------------------------------------------------------------------------------------------
                    Sources and Uses of July 2006 Refinancing
-----------------------------------------------------------------------------------------------
             Amount of
Debt         Proceeds         Use of Proceeds               Interest Rate         Maturity Date
-----------------------------------------------------------------------------------------------
First Lien   $146.5 million   $146.5 million to refinance   LIBOR plus            June 30, 2011
Credit                        Original Loan Facility        4%
Facility
-----------------------------------------------------------------------------------------------
First Lien   $20 million      General corporate purposes    LIBOR plus            June 30, 2011
Revolver                                                    3.5%
-----------------------------------------------------------------------------------------------
Second Lien  $70 million      $50 million to refinance      Tranche C —           July 27, 2012
Facility                      Original Loan Facility;       LIBOR and             (as amended)
                              $1.9 million for payables     a 10% non-accreting
                              including management          PIK
                              fees owing to MDM Systems;    Tranche D —
                              $4.2 million to refinance     2% and a 13%
                              fees and expenses;            non-accreting
                              $13.9 million to provide      PIK
                              Broadstripe with Working
                              Capital
-----------------------------------------------------------------------------------------------

Immediately following the July 2006 Refinancing, the Highland Lenders still held no equity or Management Committee seats in Broadstripe. As of July 28, 2006, the composition of the Management Committee was as follows:

------------------------------------------
Membership of
Broadstripe
Management Committee
as of July 28, 2006     Affiliation
------------------------------------------
William Phoenix         Trimaran/
                        Caravelle
------------------------------------------
Andrew Heyer            Trimaran/
                        Caravelle
------------------------------------------
Darryl Thompson         TSG Capital
------------------------------------------
Mark Inglis             TSG Capital
------------------------------------------
Cleveland Christophe    TSG Capital
------------------------------------------
Kelvin Westbrook        Broadstripe
------------------------------------------

In addition, as of July 28, 2006, the Highland Lenders' holdings were as follows:

---------------------------------------------------------------------------------
                    Highland Lenders' Holdings as of July 28, 2006
---------------------------------------------------------------------------------
                                                          Percentage of
            Holding                       Amount          Aggregate Holdings
---------------------------------------------------------------------------------
First Lien Facility      Approximately $103 million       Approximately 62%
                         — Institutional Lenders —
                         Approximately $12 million;
                         — Retail Lenders —
                         Approximately $91 million
---------------------------------------------------------------------------------
Second Lien Facility     $20 million                      28.57%
(held by Institutional
Lenders)
---------------------------------------------------------------------------------
IRNs (held by            $58.1 million                    Approximately 25%
Highland Crusader)
---------------------------------------------------------------------------------
LLC Units                de minimis (Highland Crusader)   pro rata share of
                                                          membership units (i.e.,
                                                          less than or equal to
                                                          2.5%)
---------------------------------------------------------------------------------

F. September 2006: Shreffler Becomes CEO

On or about September 1, 2006, Broadstripe hired Shreffler to replace Westbrook as CEO.

The Complaint alleges that "[i]n September 2006, Highland caused Broadstripe to change its management in a manner beneficial to Highland."10 There is no truth to the allegation. It was Trimaran, not Highland, that communicated with Shreffler in connection with his CEO-related employment negotiations. Trimaran (along with its counsel, Sonnenschein) was also responsible for drafting Shreffler's employment agreement. Since Highland Crusader possessed only de minimis equity in Broadstripe and no designees on the Broadstripe Management Committee in September 2006, Highland was incapable of "causing" (and did not cause) Broadstripe to do anything at that time. Highland did agree with the Management Committee's decision to hire Shreffler and supported his vision to expand the company through acquisitions and organic growth.

Also contrary to the allegations contained in the Complaint, Shreffler did not have "strong ties" to Highland. In fact, Shreffler testified at his deposition that, prior to the Barrier engagement, he had no previous interactions with Highland and no contact with any of its portfolio companies. While Nau (a Barrier employee at the time) identified Shreffler to Barrier as a capable cable operator when Barrier was looking to hire an industry expert as a consultant for its engagement by the IRN holders in early 2006, Nau had no involvement in hiring Shreffler to be Broadstripe's CEO.

The Complaint also alleges that "Highland then gave Kelvin Westbrook the title of Chairman" and "Mr. Westbrook reported. . . to the Highland controlled board."11 Again, this allegation is verifiably wrong. The Management Committee gave Westbrook the title of Chairman of Millennium Digital Media Systems (i.e., not the board) and Chief Strategic Officer in September 2006 — at or about the same time that Shreffler was appointed Broadstripe CEO. Also, documentary evidence clearly shows that Trimaran and its counsel were responsible for the discussions with Westbrook, not Highland. As discussed above, while Highland agreed with the Management Committee's actions related to Westbrook, this was a period during which Highland Crusader possessed only de minimis equity and no seats on the Management Committee.

G. The October 2006 Restructure

At the time of the July 2006 Refinancing, Broadstripe (OpCo) was solvent, since the $157 million proceeds of the Wave bid plus the expected proceeds of between $87.7 million and $125 million resulting from a sale of the Mid-Atlantic System exceeded the estimated $196 million debt at the OpCo level.

In contrast, since the combined proceeds of the sales would be insufficient to repay the IRN debt at Broadstripe (Capital), equity at the Broadstripe (HoldCo) level was worthless. The July 2006 Refinancing contemplated a "second step" to reflect the economic reality that, at this point in time, the IRNs functionally were equity. The "second step" ultimately closed on October 26, 2006 (the "October 2006 Restructure"). Pursuant to the October 2006 Restructure, Broadstripe redeemed and retired the equity holdings of all of its equity holders other than Trimaran. Contemporaneously, the existing IRN holders at Broadstripe (Capital) were admitted to Broadstripe (HoldCo) as "New Members" and purchased LLC Units in Broadstripe (HoldCo) for nominal consideration in the following percentages according to their pro rata holdings in the IRNs (Trimaran, which was both an equity holder and an IRN holder simply exchanged its equity for new LLC Units):

--------------------------------------------------------------------------------------
                       Membership Interests as of October 26, 2006
--------------------------------------------------------------------------------------
                                                   Percentage
                                                   of IRN                   Sharing
Member Name                                        Holdings     LLC Units   Percentage
--------------------------------------------------------------------------------------
Caravelle Millennium Investment Corp. (Trimaran)   42.86%         4,286     42.86%
--------------------------------------------------------------------------------------
Highland Crusader Offshore Partners, L.P.          25.03%         2,503     25.03%
(Highland Crusader)
--------------------------------------------------------------------------------------
Madeleine, L.L.C. (Cerberus)                       20.76%         2,076     20.76%
--------------------------------------------------------------------------------------
Credit Suisse International                         7.71%           771      7.71%
--------------------------------------------------------------------------------------
Bear Stearns Credit Products Inc.                   3.65%           365      3.65%
--------------------------------------------------------------------------------------

Trimaran and its counsel, Sonnenschein, drafted the Third Amended and Restated LLC Agreement of Millennium Digital Media Holdings, L.L.C. dated October 26, 2006 (the "LLC Agreement") and other documentation related to the October 2006 Restructure. For example, while a full conversion of the IRNs was originally contemplated, only a partial conversion was ultimately effected after Trimaran and its advisors determined that such a conversion would create adverse tax consequences for Broadstripe and its legacy equity holders (i.e., not Highland Crusader).

Pursuant to section 3.3 of the LLC Agreement, Trimaran and Highland Crusader were permitted to designate three and two persons, respectively, to the new seven-person Management Committee which was then constituted as noted in the chart below. The balance of the Management Committee was comprised of Shreffler and Westbrook.

------------------------------------
Members of Broadstripe
Management Committee
as of October 26, 2006   Affiliation
------------------------------------
Jay Bloom                Trimaran/
                         Caravelle
------------------------------------
Darren Fredette          Trimaran/
                         Caravelle
------------------------------------
David Millison           Trimaran/
                         Caravelle
------------------------------------
David Walls              Highland
                         Crusader
------------------------------------
Carl Moore               Highland
                         Crusader
------------------------------------
William Shreffler        Broadstripe
------------------------------------
Kelvin Westbrook         Broadstripe
------------------------------------

Thus, only after the October 2006 Restructure did Highland Crusader receive its first seats on Broadstripe's seven-member Management Committee, and even then, Highland Crusader's designees were outnumbered 5-2 (by Trimaran's three members and Shreffler and Westbrook). On November 14, 2006, upon motion by Bloom and second by Westbrook, the Management Committee created an executive committee (the "Executive Committee") and appointed Walls, Fredette and Shreffler to serve on it. The Executive Committee had no authority to dictate Management Committee decisions, and Highland only possessed one of the three seats on the Executive Committee. To the extent that there was anything of import to act on, the Executive Committee would present it to the Management Committee for consideration.

H. April-September 2007

i. Comcast Sale and Termination of Westbrook's Employment

Having accomplished the July 2006 Refinancing, the October 2006 Restructure, and the hiring of Shreffler as CEO, Broadstripe's next steps were to pursue efforts to divest its Mid-Atlantic assets and to begin to carry out its growth plan.

On April 23, 2007, Comcast Corp. ("Comcast") executed a definitive agreement to purchase Broadstripe's Mid-Atlantic system in Anne Arundel County, Maryland for approximately $115 million. The Comcast deal was subject to approval by the Federal Trade Commission (the "FTC").

The Comcast deal was projected to be a positive development, as it would have left Broadstripe well-positioned to begin its growth phase. The sale of the Mid-Atlantic System would not only free the company of its most challenged System, but would infuse $115 million into Broadstripe to allow it to, among other things, pay down its senior secured debt and deleverage Broadstripe's balance sheet.

On or about May 4, 2007, with the closing of the Comcast sale on the horizon, Trimaran's Darren Fredette, acting on behalf of the Management Committee (still consisting of three Trimaran seats, two Highland seats, Shreffler and Westbrook) informed Kelvin Westbrook that Westbrook's employment would terminate following the closing of the Comcast sale. Fredette and Westbrook agreed to an orderly transition in which Westbrook would be retained to shepherd Broadstripe through the closing of the sale. Broadstripe and Westbrook memorialized the transition in the form of a Separation Agreement and General Release dated June 27, 2007.

The rationale for keeping Westbrook in charge of the Comcast deal was that Westbrook had key personal relationships with Comcast's founders (including Brian Roberts — Comcast's CEO, and Roberts' father, who was Comcast's former Chairman). Indeed, as a result of these relationships, Broadstripe had been receiving ongoing tangible benefits in the form of approximately $200,000 per month in programming discounts. In addition, based on Comcast's $115 million purchase price for the Mid-Atlantic System, Westbrook had a $1 million to $1.250 million incentive to close the Comcast deal as quickly as possible (i.e., the sooner the closing, the higher the incentive).

As discussed above, the Comcast APA, which was entered into on April 23, 2007, had always been subject to approval by the FTC. Unfortunately, on September 7, 2007, Comcast chose to terminate the Comcast APA pursuant to section 11.1(e) thereof following a regulatory holdup related to a second "unexpected (and quite lengthy) request for data" from the FTC. As explained by Walls, Comcast informed Broadstripe that Comcast "would not entertain an additional request as this was over and above the information the [sic] customarily provide for small acquisitions such as this. Millennium and counsel offered to assist in any way but Comcast chose to walk."

Following Comcast's termination of the Mid-Atlantic sale, Westbrook left Broadstripe.

ii. May 2007-December 2007: Trimaran Approaches Highland to Sell Its IRN Stake

On or about May 31, 2007, with the Comcast sale pending and Broadstripe's future looking bright, Trimaran approached Highland Crusader seeking to sell Trimaran's entire IRN holdings and LLC Units.12

Trimaran's stated reason for selling its IRN holdings was that the CDO with which the IRNs invested was winding down, and Trimaran needed to monetize its IRN holdings to obtain a $9 million deferred management fee. Trimaran also believed the price Highland Crusader was willing to pay to be attractive.

Highland Crusader purchased Trimaran's IRN holdings for approximately $65 million in cash, thus increasing Highland Crusader's stake in Broadstripe's long-term future.

Trimaran conditioned the IRN sale on Highland Crusader causing Broadstripe to enter into an indemnification agreement and a general release with Trimaran. The Indemnification Agreement was negotiated by, among others, Broadstripe's counsel, Bruce Beard, and was structured to offer similar protections to those Trimaran already possessed under the LLC Agreement and the IRN Purchase Agreement. On these bases, Broadstripe's Management Committee — including Shreffler and Westbrook — evaluated and authorized the sale and Indemnification Agreement.

The trade closed on August 31, 2007, and increased Highland Crusader's IRNs holdings from approximately 46% to approximately 89%.13

Pursuant to Section 3.3(a)(ii)(A) of the LLC Agreement, and as a result of the IRN trade, Trimaran's membership (i.e., three seats) on the Management Committee ended at or about this time. As discussed above, at about this time, Westbrook also departed Broadstripe. This was the first time that Highland Crusader ever held a majority of seats on the Management Committee.14

__________________________________________
   Members of Broadstripe
   Management Committee
    as of September 2007   Affiliation
__________________________________________
   David Walls             Highland
                           Crusader
__________________________________________
   Carl Moore              Highland
                           Crusader
__________________________________________
   William Shreffler       Broadstripe
__________________________________________

I. September 2007-February 2008: Pursuit of Acquisition Opportunities by Broadstripe

Despite the blow dealt by Comcast's termination of the Mid-Atlantic sale, in September of 2007, Broadstripe continued to pursue its growth strategy in an effort to "increase [its] competitiveness and overall stability." Under Shreffler's leadership (both before and after Trimaran exited the picture), Broadstripe engaged in acquisition-related discussions with, among others, Suddenlink Communications (formerly Cebridge Connections), James Cable, Vista III Media, and Atlantic Broadband.

Beginning in October 2007, Highland's lending arm—Highland Financial Corp.— engaged in discussions with Broadstripe regarding a possible financing of the James Cable transaction. Unsigned draft proposal letters and terms sheets regarding the terms of a possible financing were exchanged between Highland and Broadstripe beginning on October 22, 2007. The draft proposal letter provided by Highland to Broadstripe prior to execution of the contained the following language:

On October 31, 2007, fully cognizant that it had no financing commitment in hand, Broadstripe's discussions with James Cable culminated in a signed APA (the "James Cable APA") with a purchase price of approximately $110 million, subject to adjustments.

Not only was there no promise made or a written financing commitment signed prior to the execution of the James Cable APA, but, in fact, it was not until November 8, 2007 (eight days after signing the James Cable APA), Broadstripe, through Wylie, finally transmitted its counsel's markup of the proposal letter and term sheet back to Highland. This proves that Broadstripe and Highland never reached agreement on the financing of the James Cable deal prior to Broadstripe's execution of the James Cable APA. Indeed, as testified to by Broadstripe's CFO, Mike Wylie, Highland never committed to finance the deal.

J. March 2008-December 2008: Market Meltdown

Unfortunately, like millions of businesses, banks and consumers worldwide, Broadstripe began confronting liquidity issues during the first quarter of 2008.

Though they too were being affected by the economic meltdown, the Highland Lenders continued to support Broadstripe to the extent they could. The Highland Lenders investigated a number of financing scenarios, in an effort to refinance Broadstripe's debt and fund the James Cables and Suddenlink deals. Unfortunately, none of the scenarios was commercially feasible to Highland.

On February 20, 2008, Highland Crusader filled one of the vacant seats on the Management Committee with Nau, bringing its membership on the now four-seat Management Committee up to three people. Nau possessed experience in the cable industry as a result of his prior employment at Cequel Communications.

In March 2008, certain of the Highland First Lien Lenders agreed to an amendment of the First Lien Facility to provide Broadstripe with $10 million of new revolver availability under the First Lien Facility. The amendment also provided for up to $55 million in accordion financing for the James Cable transaction. No lender under the First Lien facility (including the Highland Lenders) was obligated to provide the $55 million in accordion financing to finance the James Cable transaction. Unfortunately, Black Diamond—which possessed enough First Lien debt to give it a blocking position—had on several occasions taken an obstructionist position with respect to consents and amendments. Here, too, Black Diamond was refusing to consent to the amendment. As a result, the Highland Lenders were forced to actually buy out Black Diamond's approximately $64.4 million position at a price of $0.98375/dollar prior to being able to pass the amendment. This dramatically increased the size of Highland's First Lien holdings. As shown in the table below, as of March 17, 2008, the Highland defendants had the following positions with respect to Broadstripe:

__________________________________________________________________________________________________
                         Highland Lenders' Holdings as of March 17, 2008
__________________________________________________________________________________________________
                                                                 Percentage of
        Holding               Amount                            Aggregate Holdings
__________________________________________________________________________________________________

   First Lien Facility      Approximately $173 million                   Approximately 98.1%
                            —Institutional Lenders—
                            Approximately $39 million;
                            —Retail Lenders—Approximately $134 million
__________________________________________________________________________________________________
   Second Lien Facility     $62 million                                  Approximately 89%
   (held by Institutional
   Lenders)
__________________________________________________________________________________________________
   IRNs (held by            $313.46 million                              Approximately 89%
   Highland Crusader)
__________________________________________________________________________________________________
   LLC Units                N/A                                          Approximately 46%
                                                                         (Highland Crusader),
                                                                         plus membership units
                                                                         granted under IRN
                                                                         Purchase Agreement
__________________________________________________________________________________________________
   Seats on Management      Three seats out of four.                     N/A
   Committee
__________________________________________________________________________________________________

Also in March 2008, the Management Committee authorized Shreffler and Wylie to seek and explore additional sources of financing and to meet with potential financing sources for the purpose of financing James Cable and other acquisitions.

During April and May 2008, Shreffler and Wylie worked with Nau, as well as with brokers DH Capital and Waller Capital to set up meetings with potential financing sources, including TA Associates, Warburg Pincus and Providence Equity. A number of financing alternatives were discussed, including creating a new management company structure to attract outside financing for a possible James Cable acquisition or reorganizing Broadstripe's corporate structure by separating the challenged Mid-Atlantic System assets from the accreting Central and Northwest System assets and allowing new investors to invest into Central and Northwest Systems alone. Although certain of the meetings resulted in informal indications of possible interest, none progressed beyond that.

On April 16, 2008, Broadstripe terminated the James Cable APA. Litigation ensued, with James Cable suing both Broadstripe and Highland in the Delaware Chancery Court on April 24, 2008 (the "Delaware Chancery Action").16

In that litigation, James Cable alleged, among other things, that the Highland defendants had orally committed to finance the James Cable sale, and that James Cable had agreed to the deal in reasonable reliance on the Highland defendants' alleged financing commitment. James Cable asserted claims against the Highland defendants for, among other things, tortious interference, alter ego theories, and oral inducement. The Highland defendants disputed the James Cable allegations, and filed a motion to dismiss the claims. As discussed, below, on June 11, 2009, Vice Chancellor Lamb ruled on Highland's motion and dismissed Highland from the James Cable litigation in its entirety. James Cable did not appeal the decision.

Although not announced publicly until late July, in May of 2008, Shreffler notified Nau that he had decided to resign as CEO of Broadstripe.17 He had joined Broadstripe with an intention to grow the company through acquisition (and to garner personal upside through equity ownership). While he became frustrated at Broadstripe's inability to make significant acquisitions without Highland's funding, he did not blame Highland. Rather, he understood that as a result of the market collapse, the Highland Lenders were simply not in a position to fund deals of this magnitude.

During the spring and summer of 2008, the Management Committee continued to evaluate potential candidates for an independent director position. Given the economic climate and Broadstripe's liquidity issues, Kevin Dowd ("Dowd") was recommended to the Management Committee by certain individuals at Highland that had worked with Dowd on other matters, and knew him to be effective in distressed and turnaround situations. Dowd is a principal in his own restructuring advisory firm, The Berkeley Square Group LLC, and has over 30 years of experience in restructuring and holding operating management positions in distressed businesses across a wide variety of industries. On July 11, 2008, Kevin Dowd joined the Management Committee as an independent member.

__________________________________________
   Members of Broadstripe
   Management Committee
     as of July 11, 2008    Affiliation
__________________________________________
   David Walls              Highland
                            Crusader
__________________________________________
   Carl Moore               Highland
                            Crusader
__________________________________________
   Steven Tyler Nau         Highland
                            Crusader
__________________________________________
   Kevin Dowd               Independent
__________________________________________
   William Shreffler        Broadstripe
__________________________________________

Also in July 2008, Broadstripe determined that it needed another cash infusion. Prior to entering into an amendment with the second lien lenders to provide the additional liquidity, the Management Committee determined that it would be prudent to hire DH Capital to study the loan market and ensure that the amendment was being offered on terms favorable to Broadstripe. On the basis of its study, the Management Committee concluded that the terms of the amendment were superior to those Broadstripe could obtain elsewhere. The required lenders under the Second Lien Credit Facility agreed to an amendment whereby the Institutional Lenders would provide up to $17.25 million in financing under certain conditions. On July 21, 2008, Broadstripe entered into the amendment.

That same day (July 21, 2008), Broadstripe drew down $4.05 million. On August 12, 2008, Broadstripe drew down an additional $5 million.18 Following the draws by Broadstripe, the Highland defendants had the following positions with respect to Broadstripe:

__________________________________________________________________________________________________
                   Highland Lenders' Holdings as of August 12, 2008
__________________________________________________________________________________________________

                                                                  Percentage of
       Holding                         Amount                  Aggregate Holdings
__________________________________________________________________________________________________
   First Lien Facility      Approximately $173 million                   Approximately 98.3%
                            —Institutional Lenders—
                            Approximately $39 million;
                            —Retail Lenders—Approximately $134 million
__________________________________________________________________________________________________
   Second Lien Facility     $71.05 million                               Approximately 90%
   (held by Institutional
   Lenders)
__________________________________________________________________________________________________
   IRNs (held by            $313.46 million                              Approximately 92.3%
   Highland Crusader)
__________________________________________________________________________________________________
   LLC Units                N/A                                          Approximately 46%
                                                                         (Highland Crusader),
                                                                         plus membership units
                                                                         granted under IRN
                                                                         Purchase Agreement
__________________________________________________________________________________________________
   Seats on Management      Three seats out of four.                     N/A
   Committee
__________________________________________________________________________________________________

These additional loans were made by the Second Lien Lenders for working capital needs and to act as a liquidity bridge to provide Broadstripe with liquidity to sell South Lyon, a small non-core subscriber system. Unfortunately, Broadstripe was unable to sell South Lyon and so no proceeds were received.

Broadstripe continued to have liquidity issues into the third quarter of 2008. The Management Committee, upon certain of the Highland Lenders' recommendation, hired Gustavo Prilick ("Prilick") as a consultant. Prilick was a crisis manager that certain of the Highland Lenders had worked with in the past on HySky Communications, L.L.C. and SunCom Wireless Holding workouts and whose performance had impressed them.

As discussed above, Shreffler had informed the Management Committee in May 2008 of his intention to resign as CEO of Broadstripe. While Shreffler was willing to enter into a transition agreement to stay with Broadstripe until a new CEO could be found, there was a pressing need to find a suitable CEO—one with experience dealing with distressed companies.

In a July 25, 2008 e-mail from Timothy Lawler ("Lawler") of Highland Capital to Carl Moore ("Moore"), Lawler informed Moore of the preference of Jim Dondero ("Dondero"), Highland Capital's managing partner, that Broadstripe get Prilick involved in working with the company. Notwithstanding Dondero's apparent direction, however, Broadstripe did not immediately hire Prilick for any purpose but rather completed an extensive vetting process assisted by Lawler and his team. Only after reviewing dozens of candidates' resumes, and conducting multiple in-person interviews, did Broadstripe determine to retain Prilick. Even then, Prilick was hired first (on August 7, 2008) as a consultant. Only later (on or about September 5, 2008) was Prilick hired as CEO.

On October 21, 2008, Walls resigned from Highland Capital as a result of a "reduction in force" at Highland Capital and contemporaneously gave up his seat on the Management Committee. Following Wall's resignation from the Management Committee, it was comprised of two Highland Crusader designees (Nau and Moore) and two non-Highland Crusader designees (Dowd and Prilick).

____________________________________________
   Members of Broadstripe
   Management Committee
     as of October 21, 2008   Affiliation
____________________________________________
   Carl Moore                 Highland
                              Crusader
____________________________________________
   Steven Tyler Nau           Highland
                              Crusader
____________________________________________
   Kevin Dowd                 Independent
____________________________________________
   William Shreffler          Broadstripe
____________________________________________

During this same time period, Broadstripe retained and worked with Stephen Dube of CXO as financial/restructuring advisors and Gardere Wynne Sewell, LLP as insolvency counsel to assist with a potential restructuring.

On November 19, 2008, Nau resigned from the Management Committee when he was assigned to work on a different project by Highland. From that time until Broadstripe's bankruptcy filing, the Management Committee only had three members (Moore (Highland Crusader), Prilick (Broadstripe), and Kevin Dowd (independent)).

____________________________________________
   Members of Broadstripe
   Management Committee
     as of November 19, 2008   Affiliation
____________________________________________
   Carl Moore                  Highland
                               Crusader
____________________________________________
   Steven Tyler Nau            Highland
                               Crusader
____________________________________________
   Kevin Dowd                  Independent
____________________________________________
   William Shreffler           Broadstripe
____________________________________________

On November 28, 2008, Broadstripe received a forbearance from its First Lien Lenders (including the Highland Lenders) regarding a principal payment that was due to them so that it could make payments to certain trade creditors. Broadstripe also received a forbearance from its Second Lien Lenders (including the Highland Lenders) from the triggering of the Second Lien Credit Agreement's cross-default provisions.

In addition, during 2008, while Broadstripe engaged in settlement negotiations with James Cable in connection with James Cable's lawsuit in the Delaware Chancery Court, negotiations ended after Broadstripe's summary judgment motion in the Wave litigation was denied. The Highland lenders had been exploring solutions to help fund a James Cable settlement (and, in fact, an agreement had been reached in principle to fund the purchase of James Cable at a price of $95 million). Following denial of the Wave summary judgment motion, however, the Highland lenders determined that they were unwilling to sink additional funds into Broadstripe with the overhang of the continuing Wave litigation.

Broadstripe (OpCo and Capital) filed for bankruptcy protection in the Bankruptcy Court for the District of Delaware on January 2, 2009.

As discussed above, Vice Chancellor Lamb heard oral argument on the Highland defendants' motion to dismiss the James Cable lawsuit during November 2008, but had not yet ruled when Broadstripe filed for bankruptcy protection. During oral argument, V.C. Lamb made the following statement on the record to counsel for James Cable:

On January 20, 2009, James Cable filed a motion to lift the automatic stay to continue to pursue its litigation against Broadstripe in the Delaware Chancery Court.19 While the Debtors objected to the lift stay motion,20 the Highland defendants filed a response seeking the Bankruptcy Court's clarification that, regardless of whether the case remained stayed against the Debtors, the James Cable litigation was not stayed as against the Highland defendants.21 This Court ultimately denied the lift stay motion, but did clarify that the James Cable litigation was not stayed as against the Highland Defendants.22 On March 6, 2009, the Highland defendants filed a copy of the Bankruptcy Court's order with the Delaware Chancery Court.

On June 11, 2009, the Delaware Chancery Court issued a memorandum and order granting the Highland defendants' motion to dismiss, and dismissing the Delaware Chancery Action as against the Highland defendants in its entirety.23 The memorandum and order contains the following rulings by V.C. Lamb:

Despite Vice Chancellor Lamb's ruling (and the language of the draft proposal letters and CFO Wylie's deposition testimony that Highland never agreed to finance the James Cable deal), the Committee continues to press ahead with this lawsuit. Exactly like James Cable did in the Chancery Court litigation, however, the Committee has failed to allege any claims or meritorious causes of action which are sustainable against Highland.

K. Motion for Summary Judgment

Highland moved for summary judgment of all counts of the Complaint. Briefing has been completed. The Court heard oral argument on the motion on February 1, 2010. This matter is ripe for decision.

LEGAL DISCUSSION

A. Summary Judgment Standard

Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure, directs that summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law."30

Summary judgment is designed "to avoid trial or extensive discovery if facts are settled and dispute turns on issue of law."31 Its purpose is "to pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required."32 Furthermore, summary judgment's operative goal is "to isolate and dispose of factually unsupported claims or defenses"33 in order to avert "full-dress trials in unwinnable cases, thereby freeing courts to utilize scarce judicial resources in more beneficial ways."34

When requesting summary judgment, the moving party must "put the ball in play, averring an absence of evidence to support the nonmoving party's case."35 In order to continue, the burden shifts to the nonmovant to identify "some factual disagreement sufficient to deflect brevis disposition."36 Not every discrepancy in the proof, however, is enough to forestall a properly supported motion for summary judgment; the "disagreement must relate to some genuine issue of material fact."37 In other words, the summary judgment standard "provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment."38

In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the nonmovant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant.39 The same principles apply in a bench trial where the judge is the ultimate trier of fact; the nonmovant must obviate an adequate showing to the judge to find for the nonmovant.40 At the summary judgment stage, the court does not "weigh the evidence and determine the truth of the matter;" rather, the court determines "whether there is a genuine issue for trial."41 A material fact is one which "could alter the outcome" of the case. It is genuine when it is "triable," that is, when reasonable minds could disagree on the result.42 Importantly, all reasonable inferences must be drawn in favor of the nonmoving party43 and any doubt must be read in favor of the non-movant.44

The requirement that the movant supply sufficient evidence carries a significant corollary: the burden of proof is switched to the non-movant who "must present definite, competent evidence to rebut the motion."45 Such evidence "cannot be conjectural or problematic; it must have substance in the sense that it limns differing versions of the truth which a factfinder must resolve at an ensuing trial."46 Furthermore, evidence that "is merely colorable or is not significantly probative" cannot deter summary judgment.47 In response, "the non-moving party must adduce more than a mere scintilla of evidence in its favor;"48 it cannot simply reassert factually unsupported allegations contained in its pleadings.49 In other words, the non-moving party must do more than "simply show that there is some metaphysical doubt as to the material facts."50 Conversely, in a situation where there is a complete failure of proof concerning an essential element of the nonmoving party's case, Rule 56(c) necessarily renders all other facts immaterial and mandates a ruling in favor of the moving party.51

B. Count Two: Equitable Subordination

Count Two of the Complaint seeks equitable subordination of Highland's First Lien Investments and Second Lien Investments. The essence of the Committee's claim is that Highland, through their status as both statutory and non-statutory insiders, engaged in inequitable conduct by (1) blocking the WaveDivision sale and (2) inducing Broadstripe to enter into the James Cable APA, then refusing to finance the deal, harming unsecured creditors in the process. Highland asserts summary judgment is appropriate because, regardless of their status as insiders,52 (1) Highland did not act inequitably by exercising its contractual rights to not approve the WaveDivision sale, and (2) Highland never concretely committed to finance the James Cable APA.

Given the existence of triable issues of fact regarding, (1) Highland's status as an insider prior to the October 2006 Restructuring, (2) whether Highland's conduct was inequitable, and (3) whether Highland harmed Broadstripe and its creditors, summary judgment is inappropriate on Count Two.

i. Applicable Law

The Bankruptcy Code provides that a court may "under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim."53 Under the Mobile Steel framework, equitable subordination requires proof of three elements:

Courts differentiate between insiders and outsiders when analyzing whether a claimants conduct was inequitable. Indeed, "[t]he most important factor in determining if a claimant has engaged in inequitable conduct for the purposes of equitable subordination is whether the claimant was an insider or outsider in relation to the debtor at the time of the act."55 An insider's conduct is "rigorously scrutinized," and the plaintiff "bears the burden of presenting material evidence of unfair conduct that the insider claimant then must rebut by proving the fairness of his transactions with the debtor."56 The rationale behind the heightened scrutiny of insider conduct is that:

"On the other hand, if the claimant is not an insider, then evidence of more egregious conduct such as fraud, spoliation or overreaching is necessary."58

ii. Highland's Insider Status

A party may be found to constitute an "insider" for purposes of equitable subordination if the party either (1) meets the statutory definition of insider, or (2) are in a close relationship with the debtor to such an extent as to suggest transactions were not conducted at arm's length.59

The Bankruptcy Code contains a list of entities always deemed "insiders" of a debtor, including an "affiliate, or insider of an affiliate as if such affiliate were the debtor."60 An "affiliate" is an:

In addition, "courts have uniformly held that the Bankruptcy Code's definition is merely illustrative and that the term `insider' must be flexibly applied on a case-by-case basis."62 The Third Circuit held that "it is not necessary that a non-statutory insider have actual control; rather the question is whether there is a close relationship [between the debtor and creditor] and . . . anything other than closeness to suggest that any transactions were not conducted at arm's length."63 Courts have looked at various factors in determining a creditor's insider status, including whether the creditor: (1) attempted to influence decisions made by the debtor; (2) selected new management for the debtor; (3) had special access to the debtor's premises and personnel; (4) was the debtor's sole source of financial support; (5) generally acted as a joint venture or prospective partner with the debtor rather than an arm's-length creditor; (6) control over the debtor's voting stock; (7) managerial control, including personnel decisions and decisions as to which creditors should be paid; (8) whether the relationship between the debtor and lender was the result of an arm's-length transaction.64

a. Highland was a statutory insider from October 26, 2006 through today.

Prior to the October 2006 Restructuring, Highland, through Highland Crusader, owned only a de minimis amount of the LLC Units of Broadstripe Holdings, LLC, although Highland owned significant amounts of Broadstripe's debt. For instance, after the July 2006 Refinancing, Highland, through various funds, owned approximately 62% of the First Lien Investments, 28% of the Second Lien Investments, and 25% of the IRNs. According to Highland's own papers, "[t]he July 2006 Refinancing contemplated a `second step' to reflect the economic reality that, at this point in time, the IRNs functionally were equity" since the projected valuation of the enterprise was insufficient to fully repay the IRNs and therefore no equity existed at the Broadstripe Holdings, LLC level.65 Pursuant to the October 2006 Restructuring, the LLC Units were functionally redistributed to the IRN holders, wherein Highland obtained 25% of the LLC units, held by the Highland Crusader entity.66 Accordingly, there is no issue of material fact that after the October 2006 Restructuring, Highland became a statutory insider by virtue of holding over 20% of the voting securities in Broadstripe.

b. There are issue of material fact as to whether Highland was a non-statutory insider prior to the October 2006 Restructuring.

Under the Third Circuit's two-part test for non-statutory insiders from Winstar, there are genuine issues of material fact as to "whether there is a close relationship [between the debtor and creditor] and . . . anything other than closeness to suggest that any transactions were not conducted at arm's length."67

Highland, through its holdings of the IRNs, was in a close relationship with Broadstripe. As of March 31, 2005, Highland owned: (1) 11.4% of the Original Loan Facility, and (2) 23% of the IRNs. Highland's holdings remained relatively constant until after Broadstripe's execution of the WaveDivision purchase agreements on February 8, 2006. Subsequently, Highland increased its holdings to: (1) 52.6% of the Original Loan Facility, and (2) 25% of the IRNs by March 29, 2006. After the July 2006 Refinancing (which retired the Original Loan Facility), Highland held: (1) 62% of the First Lien Investments, (2) 28% of the Second Lien Investments, and (3) 25% of the IRNs. As noted earlier, by July 2006 at the latest, the Highland recognized that the LLC Units in Broadstripe Holdings, LLC were worthless, and that "the IRNs functionally were equity."68 Accordingly, due to its substantial holdings of Broadstripe debt from March 2005 through October 2006, Highland was in a close relationship with Broadstripe.

In addition, the Committee alleges facts which, viewed in the light most favorable to the Committee, reflect that Highland may not have conducted transactions at arm's length. The following allegations are excerpted from the Committee's response to Highland's Motion:

The Committee also alleges various other facts which, according to the Committee, support its position that Highland was a non-statutory insider. However, the majority of the other allegations occurred after the October 2006 Restructuring, whereafter Highland was already a statutory insider. The only allegations which support the Committee's contention that Highland was a non-statutory insider prior to October 2006 are the allegations above, specifically that: (1) Highland directed Broadstripe to hire Shreffler as CEO in September 2006, (2) Highland caused Broadstripe to retain and compensate Barrier, an affiliate of Highland as consultants, and (3) that Highland caused Broadstripe to retain NexBank as the agent for the Second Lien Investments in the July 2006 Refinancing.

Oddly, by not differentiating between the pre- and post-October 2006 Restructuring periods, the Committee's papers' argument that Highland was a non-statutory insider pre-October 2006 Restructuring is lackluster. Such argument is adequately laid out by Vice Chancellor Strine in his bench ruling in WaveDivision Holdings, LLC v. Millennium Digital Media Systems.70

What VC Strine is referring to is the following timeline:

The argument is that Highland (and Trimaran), holders of large amounts of the IRNs realized they would be virtually wiped out by the WaveDivision sale and their consent would most likely not be required to the sale, thus embarked on a course of conduct to prevent such an event. Highland and Trimaran then hired Barrier, at Broadstripe's expense, as investment bankers to analyze alternative scenarios to the WaveDivision sale. Highland then acquired a majority position in the Original Loan Facility to block the WaveDivision sale. At that point, with the sale blocked, and a maturity date of June 30, 2006 on the Original Loan Facility, Broadstripe had no choice but to enter into the July 2006 Refinancing and the October 2006 Restructuring. This culminated in Highland's control of Broadstripe. Accordingly, there are triable issues of fact as to whether Highland was a non-statutory insider prior to the October 2006 Restructuring.

iii. Inequitable Conduct

a. Inequitable Conduct Surrounding the WaveDivision Sale

The Committee alleges that Highland acted inequitably in connection with blocking the WaveDivision sale. I will let the Committee explain their argument:

Highland takes the position that there is simply nothing wrong with its conduct in blocking the sale. Highland believes it was simply exercising their rights as creditors not to consent to the proposed sale. Here is the Third Circuit in Winstar's take on exercising contractual rights as a creditor:

First, it is worth noting that the determination of whether Highland's conduct was inequitable is highly dependent of whether Highland was indeed a non-statutory insider. If Highland was not an insider, there is little doubt this conduct does not constitute "fraud, spoliation or overreaching."74

However, the question of whether Highland was a non-statutory insider is wrapped up with the question of whether Highland acted inequitably. Both questions require a factual determination of whether Highland was simply exercising its contractual rights "incidental" to its position in the Original Loan Facility, or whether Highland's conduct controlled Broadstripe to the point of becoming an insider. Here, Highland blocked the WaveDivision sale not for the benefit of the Original Loan Facility, which gave it the blocking position, but rather for the benefit of the IRNs, which had no blocking position. Moreover, Highland did not expressly block the sale until, working with Trimaran (which held multiple board seats) the Barrier consultants/bankers generated a feasible refinancing plan using inside corporate information.

b. Inequitable Conduct Surrounding the James Cable APA

The Committee also argues that Highland acted inequitably by leading Broadstripe's management team to believe that Highland would finance the acquisition of the James Cable system assets, then refusing to finance the deal after the APA was signed and Highland concluded the deal was uneconomic. This appears to be the Committee's best argument regarding equitable subordination because there is no dispute that Highland was an insider at the time the conduct occurred. According to the Committee:

Highland's argument is simple; it never entered into a binding contract with Broadstripe to fund the James Cable APA and any reliance by Broadstripe was unreasonable, based on vague statements of encouragement. Highland begins by noting that the transmission e-mail of Highland's draft proposal to Mike Wylie, Broadstripe's CFO nine days prior to the execution of the James Cable APA states: "In line with our phone call, I attached a preliminary indication of terms for Broadstripe Corp, LLC that may make sense based on the separate structures for the transaction. We can use this as a launch of discussion terms that may be helpful over the next few days."76 The proposal letter itself contains numerous disclaimers that the proposals and term sheet were non-binding. Furthermore, eight days after signing the James Cable APA, Broadstripe transmitted its counsel's markup of the proposal letter and term sheet back to Highland. The term sheet reflected numerous open economic issues, including with respect to payment of filing and recording fees, allocation of the possible financing among first and second lien facilities, whether the financing would contain a base rate interest option, whether the unused revolver fee would be flat or would change according to a leverage grid, the size of the administrative agent fee, excluded collateral, conditional precedent to closing, and events of default. And no proposal letter was ever signed.

Highland also asserts that it was unreasonable for Broadstripe, particularly Shreffler, to rely on "vague statements of encouragement" to finance the James Cable APA. Particularly, Highland notes that "the Committee cannot invoke the doctrine of promissory estoppel to try to back Highland into a commitment that Highland did not make."

In this case, there are triable issues of fact as to whether Highland acted inequitably. While proving promissory estoppel would be helpful to the Committee's case, it is not necessary, as the Committee only needs to make a showing that Highland acted inequitably. There are legitimate factual issues surrounding this issue. Due to Highland's status as insiders, the situation at bar is not the same as two separate entities negotiating financing for an APA at arm's length. By the point in Highland and Broadstripe's relationship that the James Cable APA was signed, Highland was an undisputed statutory insider, holding significant amounts of debt and equity in Broadstripe. Moreover, Highland had seats on the board and there are questions of fact as to the extent of Highland's involvement in the day-to-day management and operations of the company. Specifically, there are significant questions of fact regarding Highland's involvement in strategic decision-making for acquisitions. Even though the term sheets and the proposal letter for the James Cable APA financing reflected they were mere proposals and non-binding, there are significant factual questions as to whether, given the extent of Highland's involvement in the company, whether it was reasonable for Broadstripe to assume that Highland would finance the APA, and thus, whether it was inequitable for Highland to "do a 180" and refuse to fund the deal.

iv. Harm Caused by Inequitable Conduct

The second element of the Mobile Steel test requires the proponent of equitable subordination to plead and prove that the offending conduct caused injury to the debtor or to its creditors. In determining whether the claimant's inequitable conduct has caused harm to other creditors or provided said claimant with an unfair advantage, the Court must look to and consider the effects on creditors then-known, and also on those to be identified in the future.77 "If the misconduct results in harm to the entire creditor body, the objecting party need not identify the injured creditors or quantify their injury, but need only show that the creditors were harmed in some general, concrete manner."78

"A bankruptcy court should ... attempt to identify the nature and extent of the harm it intends to compensate in a manner that will permit a judgment to be made regarding the proportionality of the remedy to the injury that has been suffered by those who will benefit from the subordination."79 However, quantification of harm may not always be feasible and, where that is the case, it should not redound to the benefit of the wrongdoer.80

a. Harm Caused by Inequitable Conduct Surrounding the WaveDivision Sale.

The Committee alleges significant harm arising from the terminated WaveDivision sale. First, the Committee argues Broadstripe was exposed to litigation. To date, said litigation has cost over $3 million in legal fees. In addition, WaveDivision has asserted claims over $100 million in the bankruptcy case. Second, the termination of the sale caused reputational risk. Third, the WaveDivision litigation drove Broadstripe into bankruptcy because Highland, particularly Daugherty, refused to provide further financing or finalize a deal with James Cable once Broadstripe lost its summary judgment motion in the WaveDivision litigation in Chancery Court.

Accordingly, there are triable issues of fact regarding harm caused by the Highland's refusal to consent to the WaveDivision sale.

b. Harm Caused by Inequitable Conduct Surrounding the James Cable APA.

The Committee alleges significant harm arising from Highland's inducement of Broadstripe to enter into the James Cable APA then refusal to finance the transaction. Particularly, Broadstripe was exposed to legal fees, reputational harm, and potential exposure to large claims.

Highland asserts that Broadstripe, and the Committee, are actually better off since Highland avoided financing the transaction. This theory is as follows: the purchase price of the James Cable APA was $116 million. If the price was funded by Highland, it would have required $116 million in secured debt. However, by March 2009, the price of the James Cable assets declined to approximately $61 million. Thus, if the sale had closed, Broadstripe would be saddled with an additional $116 million in secured debt and an additional asset only worth $61 million. However, in the current case, Broadstripe is only facing a $56.65 million unsecured claim from James Cable.

Highland's argument is too clever by half. This argument, that Broadstripe is actually better off, depends on a variety of assumptions wherein there are triable issues of fact. In particular (1) Highland ascribes a particular valuation to the James Cable assets which may be indispute; (2) Highland assumes the entire transaction would be financed with secured debt when evidence exists that Highland contemplated a mixed financing package using secured debt, unsecured debt, and equity; (3) the secured debt may be subject to recharacterization or other equitable remedies; and (4) the costs the of the James Cable deal's collapse may be higher than Highland's assertion, particularly once litigation costs are taken into account.

Accordingly, there are triable issues of fact regarding harm caused by Highland's alleged inducement of Broadstripe to enter into the James Cable APA then refusal to finance the transaction.

C. Count One: Recharacterization

Count One of the Complaint seeks recharacterization of Highland's approximately $62 million in Second Lien Investments as equity. The essence of the Committee's claim is that, as it alleges, Highland "infused money ... at out of market terms, recognizing slim chances of repayment, with substantially all interest payments deferred and [did] so, not in exchange for real collateral, but rather for further control of the [c]ompany."81 This type of investment, according to the Committee, should be treated as equity. Highland asserts that the Second Lien Investments were entirely appropriate as secured debt, and accordingly, that summary judgment is appropriate.

Ultimately, the Committee has an uphill climb to recharacterize the Second Lien Investments as equity, given that the Third Circuit, in SubMicron noted that "when existing lenders make loans to a distressed company, they are trying to protect their existing loans and traditional factors that lenders consider (such as capitalization, solvency, collateral, ability to pay cash interest and debt capacity rations) do not apply as they would when lending to a financially healthy company."82 However, in SubMicron Judge Ambro also placed considerable weight on the Judge Robinson's "reference to the conflicting testimony and relative credibility of witnesses presented by both parties," while noting that, with respect to recharacterization, "[a]nswers lie in facts that confer context case-by-case."83 Given the nature of the inquiry, and the fact intensive nature of this case, triable issues of fact appear to exist and summary judgment is inappropriate on Count One.

i. Applicable Law.

Recharacterization and equitable subordination are related, but distinct remedies. "Equitable subordination is apt when equity demands that the payment priority of claims of an otherwise legitimate creditor be changed to fall behind those of other claimants," while recharacterization seeks to determine "the proper characterization in the first instance of an investment."84

Recharacterization is grounded in a bankruptcy court's "equitable authority to ensure `that substance will not give way to form, that technical considerations will not prevent substantial justice from being done.'"85 The focus of a recharacterization inquiry is "whether `a debt actually exists'."86 Ultimately, the "overarching inquiry" is "whether the parties called an instrument one thing when in fact they intended it as something else."87 The Third Circuit is clear that such intent "may be inferred from what the parties say in their contracts, from what they do through their actions, and from the economic reality of the surrounding circumstances."88 Accordingly, recharacterization depends on facts, which "confer context case-by-case."89 Recharacterization is a question of fact.90 Courts have adopted various multi-factor tests to define the recharacterization inquiry.91 The Third Circuit has held that all of these tests include "pertinent factors."92 Rather than simply repeat the factors here, this analysis will use the factors as sub-headings. However, as the Third Circuit frequently cautions, "[n]o mechanistic scorecard suffices,"93 and the Court must not allow a multi-factor test to obscure the relevant factual and legal analysis.

ii. Names Given to the Instruments, if any, Evidencing the Indebtedness.

The first factor in AutoStyle is the names given to the instruments. "The absence of notes or other instruments of indebtedness is a strong indication that the advances were capital contributions and not loans."94

Here, the Second Lien Investments are provided for under a "credit facility," and are consistently referred to as "loans" or "debt" and are evidenced by "notes."95 This factor weighs heavily in favor of characterizing the Second Lien Investments as debt.

iii. Presence or Absence of a Fixed Maturity Date and Schedule of Payments.

The next factor in AutoStyle is the presence or absence of a fixed maturity date and schedule of payments. "The absence of a fixed maturity date and a fixed obligation to repay is an indication that the advances were capital contributions and not loans."96

Here, the Second Lien Investments had a stated maturity date of July 27, 2012. Accordingly, this factor weighs in favor of characterizing the Second Lien Investments as debt.

iv. No Fixed Rate of Interest and Interest Payments.

One factor in the AutoStyle analysis is the presence or absence of a fixed rate of interest and interest payments. The absence of such is a strong indication the investment was a capital contribution, rather than a loan.

The Second Lien Investments were issued in two tranches: Tranche C, in the principal amount of $30 million and Tranche D, in the principal amount of $40 million. Tranche C required periodic payments at the LIBOR Rate, with an additional 10% interest accruing as PIK, payable at maturity. The Tranche C Libor Payments did not have a fixed payment schedule, rather Broadstripe could select payment dates. The payment history reflects payments were made sporadically with no consistent frequency. Tranche D required monthly payments of 2%, with an additional 13% interest accruing as PIK, payable at maturity.

Here, the Second Lien Investments contain some fixed interest rates and some fixed interest payments. While Broadstripe was able to determine its interest payments schedule on Tranche C, interest payments were made. Tranche D required regular interest payments, albeit at a very low rate. Moreover, the presence of PIK interest is not decisive, especially in a distressed investment context.97 This factor does not weigh heavily in any direction, but slightly in favor of the Second Lien Investments being categorized as debt.

v. Repayment Dependent on Success.

Another factor in the AutoStyle test is the source of repayments. "If the expectation of repayment depends solely on the success of the borrower's business, the transaction has the appearance of a capital contribution."98

Here, the Committee cites correspondence from corporate counsel Kevin Conboy to Highland, responding to a request that Broadstripe demonstrate full repayment of the credit facility prior to maturity, that Broadstripe was most likely unable to make repayments out of cash flows:

David Walls also testified in his deposition that even if Broadstripe met its budgets it still would have been unable to make complete cash payments, which is why a PIK component was necessary for the Second Lien Investments.100 Thus, the Committees' evidence shows that Highland was aware that Broadstripe would be unable to repay the Second Lien Investments prior to maturity out of operating cash flows.

This factor most likely requires more detailed testimony as to whether Broadstripe was, indeed, unable to repay the Second Lien Investments out of operating cash flows prior to maturity. However, given the available evidence, this factor weighs in favor of recharacterization as equity.

vi. Inadequacy of Capitalization.

Another factor in the AutoStyle test is the adequacy of capitalization. "Thin or inadequate capitalization is strong evidence that the advances are capital contributions rather than loans."101

First, Broadstripe was on the verge of covenant default under the Original Loan Facility prior to the July 2006 Refinancing. In addition, on April 7, 2006, Broadstripe's auditors issued a "going concern" notice. The auditors observed "management has determined it is probably the Company will not comply with the payment terms included in its existing senior credit facility which matures on June 30, 2006. These conditions raise substantial doubt about the Company's ability to continue as a going concern."102

Again, whether Broadstripe was adequately capitalized in July 2006 is a fact intensive question. Given the available evidence, this factor weighs in favor of recharacterization as equity.

vii. Identity of Interests Between Creditor and Stockholder.

Another factor in the AutoStyle test is the identity of interest between the creditor and the stockholder. "If stockholders make advances in proportion to their respective stock ownership, an equity contribution is indicated. On the other hand, a sharply disproportionate ratio between a stockholder's percentage interest in stock and debt is indicative of bona fide debt. Where there is an exact correlation between the ownership interests of the equity holders and their proportionate share of the alleged loan this evidence standing alone is almost overwhelming."103

According to the Committee:

It is difficult to understand the Committee's point here. Taking what the Committee is alleging as true, the IRNs were functionally equity at the time of the July 2006 Refinancing. Highland owned about 25% of the IRNs/equity. Broadstripe then commenced the July 2006 Restructuring, whereafter, taking into account that Foothills "seasoned" the Second Lien Investments, Highland owned 88.57% of the Second Lien Investments. Under the AutoStyle analysis, the key to the "identity of creditors and shareholders" factor is proportionality.105 Yet here, Highland's ownership of 88.57% is vastly out of proportion to its "equity" stake of 25%.

Accordingly, this factor weighs in favor of the Second Lien Investments being characterized as debt.

viii. Security, if any, for the Advances.

Another factor in the AutoStyle test is presence or absence of security for the advances made under the alleged debt. "The absence of a security for an advance is a strong indication that the advances were capital contributions rather than loans."106

In this case, there is a genuine factual issue as to whether the Second Lien Investments were undersecured, or would even be out of the money at the time of the July 2006 Refinancing. Under the July 2006 Refinancing, Broadstripe incurred $166.5 million in First Lien Investments and $70 million in Second Lien Investments. The proposed WaveDivision sale was to net $150.1 million. The only remaining asset, the Maryland system, was not provided with a value in the parties' papers. There is a material issue of fact regarding the valuation of the company, and accordingly, the amount of security available for the Second Lien Investments in July 2006.

ix. Ability to Obtain Financing From Outside Lending Institutions.

Another factor in the AutoStyle test is the debtor's ability to obtain outside financing. "When there is no evidence of other outside financing, the fact that no reasonable creditor would have acted in the same manner is strong evidence that the advances were capital contributions rather than loans."107

According to the Committee:

Viewing the evidence most favorably to the Committee, Highland provided financing on terms that would be unavailable in the market. However, the Third Circuit, in SubMicron noted that "when existing lenders make loans to a distressed company, they are trying to protect their existing loans and traditional factors that lenders consider (such as capitalization, solvency, collateral, ability to pay cash interest and debt capacity rations) do not apply as they would when lending to a financially healthy company."109 Accordingly, this factor, while weighing in favor of recharacterization as equity, should be afforded little to no weight.

x. Extent to Which the Advances Were Subordinated to the Claim of Outside Creditors.

Another factor in the AutoStyle test is the extent to which the payments to be made are subordinated to the claims of outside creditors. "Subordination of advances to claims of all other creditors indicates that the advances were capital contributions, not loans."110

The Second Lien Credit Facility contained a PIK component and minimal cash payment. This was allowed Broadstripe to pay trade other creditors, rather than Highland. As explained by Daugherty at his deposition: "Well, the company was better suited to use its cash for its operations and to pursue growth and cost adjustments than it was to pay interest. So it was very common for second liens especially to have a PIK component that allows the company to keep its cash flow for growth, but rewards the second lien holder for not—for basically foregoing a cash pay coupon." (Daugherty Depo., 258:13-19).

The Second Lien Investments are the most subordinate tier of claims, except for unsecured claims (the two largest of which are involuntary creditors, WaveDivision and James Cable). The IRN units are superior, based on the corporate structure to both the First Lien and Second Lien Investments. The Second Lien Investments are thus, the most subordinate in the capital structure.

Accordingly, this factor weights in favor of recharacterizing the Second Lien Investments as equity.

xi. The Extent to Which the Advances Were Used to Acquire Capital Assets.

Another factor in the AutoStyle test is whether the advances were used to acquire capital assets. "Use of advances to meet the daily operating needs of the corporation, rather than to purchase capital assets, is indicative of bona fide indebtedness."111

Here, Broadstripe used the $70 million provided under the Second Lien Investment as follows: (1) $50 million to refinance the Original Loan Facility; (2) $1.9 for payables including management fees owing to MDM Systems; (3) $4.2 million to refinance fees and expenses; and (4) $13.9 million to provide Broadstripe with working capital.

Thus, this factor weighs in favor of treating the Second Lien Investments as debt. In fact, the vast majority of the Second Lien Investments were used, not simply for operating expenses, but to refinance existing secured debt.

xii. Presence or Absence of a Sinking Fund.

Another factor in the AutoStyle test is the presence or absence of a sinking fund to provide repayments.

Highland concedes there was no sinking fund, but argues that "the presence or absence of a sinking fund is insignificant where, as here, the loans were fully secured." (Memo, ¶ 8). They provide no evidence that the Second Lien Investments were, in fact, fully secured.

As such, a material dispute of fact surrounds Highland's assertion that the Second Lien Investments were fully secured.

xiii. Summary.

As discussed above, given the nature of the inquiry, and the fact intensive nature of this case, the Court finds that triable issues of fact exists and summary judgment is inappropriate on Count One.

D. Count Three: Alter Ego

Count Three of the Complaint seeks a ruling that Broadstripe was the alter ego of Highland. The essence of the Committee's claim is that Highland so completely and thoroughly dominated Broadstripe by placing Walls and Nau on the board, who then proceeded to act, not as board members, but as agents of Highland in the best interest of Highland. Highland point to the fact that Broadstripe was a large operating cable company, observing corporate formalities.

Summary judgment in favor of Highland is appropriate on Count Three. The Committee's factual allegations give rise to triable issues of fact regarding breaches of fiduciary duty, not an alter ego claim.

i. Applicable Law.

Delaware law permits a court to pierce the corporate veil of a company "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner."112 The District Court for Delaware has applied the doctrine of alter ego.113 To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the companies "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness ... [is] present."114

The Third Circuit uses the following multi-factor test for determining whether a "single economic entity" exists between entities: (1) undercapitalization; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) the insolvency of the debtor corporation at the time; (5) siphoning of the corporation's funds by the dominant stockholder; (6) absence of corporate records; and (7) the fact that the corporation is merely a facade for the operations of the dominant stockholder or stockholders.115 However, "[w]hile no single factor justifies a decision to disregard the corporate entity, some combination of the above is required, and an overall element of injustice or unfairness must always be present, as well.116

ii. Operation as Single Economic Entity.

Without breaking down the Committee's facts by the above factors, the Committee points to the following facts as evidence of Highland's domination and control over Broadstripe:

For its part, Highland points to facts reflecting that Broadstripe was an independent economic entity, such as: (1) Broadstripe was cable company with hundreds of employees, operations in multiple states, and tens of millions in annual revenues; (2) headquartered in St. Louis, had its own CFO, treasurer, bank accounts, accounting department, paid taxes, operating expenses, insurance; (3) possessed formation and operational documents, issued audited financial statements, maintained active Management Committee, which conducted regularly-held board meetings.

The Committee's allegations do not create triable issues of fact as to whether Highland and Broadstripe were a single economic entity. Rather, they create triable issue of fact regarding breaches of fiduciary duty by Walls, Nau, and Highland. The Committee, in effect, alleges that Walls and Nau were moles or double agents within Broadstripe, such that they were using their role inside Broadstripe to benefit Highland. However, such allegations do not create triable issues of fact that Broadstripe and Highland were a single economic entity. Accordingly, summary judgment is granted as to Count Three.

iii. Overall Element of Injustice or Unfairness.

As there are no triable issues of fact regarding the first prong of the alter-ego test and summary judgment is granted as to Count Three, the Court will not address the overall element of injustice or unfairness.

E. Counts Four and Five: Breach of Duty of Care and Loyalty

Counts Four and Five of the Complaint seeks damages related to Highland's (alleged) breaches of the duty of care and loyalty to Broadstripe and its creditors by not acting as reasonably prudent business persons in considering all the information available and acting on an informed basis. The Committee's claim focuses on the following conduct (among others): (1) blocking the WaveDivision sale; (2) limiting Broadstripe's access to financing to make acquisitions; (3) ignoring the Broadstripe's best interest when making director and officer hirings; and (4) failing to use expertise as to how to rehabilitate the Debtors. Highland asserts summary judgment is appropriate because (1) Broadstripe (OpCo) was solvent during the period in which the Wave sale was being considered; (2) Highland did not control Broadstripe during the WaveDivision transaction, it was merely a lender; (3) the entry into the July 2006 refinancing was not a breach of any duty; (4) Highland had no duty to lend money to Broadstripe; (5) there was no resulting harm to Broadstripe; (6) all hirings were in Broadstripe's best interests.

i. Applicable Law

A claim for fiduciary duty requires proof of two elements: (1) that a fiduciary duty existed and (2) that the defendant breached that duty.

To breach the fiduciary duties of care there must be gross negligence and the failure to act on an uninformed basis.117 "The more significant the subject matter of the decision, the greater is the requirement to probe and consider alternatives. For example, when the decision is to sell the company or to engage in a recapitalization that will change control of the firm, the gravity of the transaction places a special burden on the directors to make sure they have a basis for an informed view."118 "While a board of directors may rely in good faith upon information, opinions, reports or statements presented by corporate officers, employees and experts selected with reasonable care, 8 Del. C. § 141(e), it may not avoid its active and direct duty of oversight in a matter as significant as the sale of corporate control."119

To allege a breach the fiduciary duty of loyalty the "plaintiffs must allege facts showing that a self-interested transaction occurred, and that the transaction was unfair to the plaintiffs."120

Fiduciary duties are only owed to creditors of insolvent121 companies.122 "Once a corporation becomes insolvent, however, the directors assume a fiduciary or `quasi-trust' duty to the corporation's creditors."123 Insolvency is an issue of material fact (Plaintiff claims that Broadstripe was "balance sheet" and/or "cash flow" insolvent; defendants claim that Broadstripe was solvent because the offers to purchase the various portions of the business exceeded the amount of debt at the OpCo level).

The Committee alleges that as Highland was on both sides of each of the transactions, that the "business judgment rule" no longer applies and that they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain.124 "The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts."125 This "fairness" requirement contains both (i) fair dealing and (ii) fair price, examined together as a whole.126 "Fair dealing" involves elements such as (i) when the transaction was timed, (ii) how it was initiated, (iii) how it was structured, (iv) how it was negotiated, (v) how it was disclosed to the directors, and (vi) how the approvals of the directors and the stockholders were obtained.127 "Fair price" includes such considerations as "economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock."128

ii. Control Over Broadstripe

The Committee alleges that Highland controlled Broadstripe during the Wave Division Sale by the following: (i) Highland Fund's IRN holdings functioned as equity, giving it control; (ii) HCMLP exercised control over Broadstripe by preventing the Wave Division sale; and (iii) HCMLP's control is demonstrated by its involvement in the selection of Shreffler as CEO in September 2006. There are triable issues of fact as to whether the above constitutes control over Broadstripe during this time.

iii. Solvency

The Committee alleges that Broadstripe was insolvent which would shift the fiduciary duties to Broadstripe's creditors. Highland argues that Broadstripe was solvent during these time periods which would mandate dismissal of the fiduciary duties counts. Based on the evidence presently before the Court, there is a triable issue of fact regarding Broadstripe's solvency, or insolvency, during the relevant time periods.

iv. Breaches of Duty of Care and "Entire Fairness" in its Dealings

The Committee alleges that HCMLP was self-interested with respect to the Wave Division sale, the July 2006 Refinancing, and the James Cable sale. The Committee alleges that HCMLP took these actions with knowing disregard for Broadstripe's best interests and without "fair dealings" and not at arm's-length. As discussed above, there are triable issues of fact as to Highland's actions, whether they were in control of Broadstripe at the relevant times, and whether such actions harmed Broadstripe. Therefore, summary judgment is inappropriate.

v. Summary

There are triable issues of fact regarding (1) Highland's status as an insider during the Wave transaction, (2) whether Highland's conduct was inequitable, (3) whether Broadstripe was insolvent, and (4) whether Highland harmed Broadstripe and its creditors; as such, summary judgment is denied as to Counts Four and Five.

F. Counts Six and Seven: Aiding and Abetting Breaches of Fiduciary Duties

Counts Six and Seven of the Complaint allege that the Management Committee breach its fiduciary duties of care and loyalty by (i) interfering with the Wave transaction in order to allow Highland to amass a blocking position of the 2000 Credit Facility debt; (ii) failing to consider the interest of the unsecured creditors in distributing the Debtors' asserts; (iii) causing the Debtors to pursue acquisitions, but denying the ability of Broadstripe to finance those acquisitions (exposing the Debtors to substantial risk and liabilities), (iv) ignoring the best interests of Broadstripe when making director and officer hirings, (v) treating Broadstripe like an investment rather than a company to which it owed duties; and (vi) failing to provide its expertise as to how to rehabilitate the Debtors. Counts Six and Seven continue by claiming that Highland knew of these breaches and failed to stop them, instead Highland took advantage of these breaches for the benefit of Highland.

Highland's motion for summary judgment argues that the record evidences that the Management Committee used its business judgment in reasonably trying to grow Broadstripe and that the Management Committee relied on experts and reports in making all of their decisions.

The Plaintiff argues that there are substantial material issues of fact to preclude summary judgment. The Plaintiff alleges that Highland knew all the details of each of the transactions at issue and "urged" the Highland designees on the Management Committee.

i. Applicable Law

"In order to be found liable for aiding and abetting a breach of a fiduciary duty, one must demonstrate that the party knew that the other's conduct constituted a breach of a fiduciary duty and gave substantial assistance or encouragement to the other in committing that breach."129 There are four elements to a claim of aiding and abetting a breach of fiduciary duty: (i) the existence of a fiduciary relationship; (ii) a breach of the fiduciary's duty; (iii) knowing participation in that breach by the defendant; and (iv) damages proximately caused by the breach.130

"Knowing participation" in a board's fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach.131 In Healthco International,132 the Court found that a party that purchased the debtor's stock in a leveraged buyout was a "knowing participant" in the director's breach of fiduciary duties because it placed three members of the board with the mandate to sell its stock, it (through a representative) attended several board meetings, it urged the board at every step and knew all of the essential details of the proposed transaction.

ii. Conclusion

In addition to the material and triable facts set forth in connection with Counts Four and Five. There are material issues of fact relating to Highland's control and urging of the Management Committee to warrant denial of the motion for summary judgments on Counts Six and Seven.

G. Counts Eight and Nine: Preferences

Count Eight of the Complaint seeks recovery or approximately $9.4 million on account of transfers made to or for the benefit of Highland with respect to the First Lien Investments. Count Nine of the Complaint seeks recovery of approximately $1.63 million on account of transfers made to or for the benefit of Highland with respect to the Second Lien Investments.

Highland argues that only "Highland Crusader" was an insider (as owner of IRNs, LCC Units or possessing the rights to designate members to the Management Committee). Therefore, pursuant to § 547(b)(4), the one-year preference period may apply to Highland Crusader, the other Highland defendants should only be subject to the 90-day preference period. Secondly, Highland argues that as to the First Lien Transfers, it was fully-secured and would therefore receive the same amount in a liquidation. Lastly, Highland asserts several defenses to the preference actions, including (i) ordinary course defenses and (ii) new value defenses.

The Committee responds that all the Highland defendants are "insiders" and therefore the one-year preference period is applicable.133 The Committee also argues that Highland was not "fully secured" so therefore would receive less in a chapter 7 case. This is a material issue of fact (whether the First Lien Investments are fully secured) (this also ties with whether the Committee can equitably subordinate the First Liens). Also the Committee asserts that it is inappropriate at this time to consider the defendants' affirmative defenses (such as ordinary course, new value)—as such items must be supported by evidence for which there is none at this time.

i. Applicable Law

A preferential transfer, or "preference," is "a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankruptcy estate."134

Section 547(b)(4)(B) states that a trustee "may avoid any transfer of an interest of the debtor in property made between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider."135

ii. Conclusion

There are genuine material issues of fact: (i) whether the First Lien Investments were fully secured; (ii) whether the First Lien Debt is being equitably subordinated; (iii) whether the First Liens and Second Lien Investments were made in the ordinary course of business in accordance with ordinary business terms. As such, summary judgment is denied as to Counts Eight and Nine.

H. Count Eleven: Recovery of Avoidance Actions

The Count Eleven of the Complaint seeks recovery of Counts Eight, Nine, and Ten pursuant to § 550. As summary judgment is denied as to Counts Eight and Nine, the Court will also deny summary judgment as to Court Eleven.

I. Count Twelve: Disallowance Under Principles of Equity and § 502(d)

Count Twelve of the Complaint seeks disallowance of Highland's claims pursuant to § 502(d).

Highland argues that the Plaintiff cannot support its equitable subordination claim so therefore it cannot support its § 502(d) claim.

i. Applicable Law

Section 502(d) states: "the court shall disallow any claim of any entity from which property is recoverable under section ... section 550 ... unless such entity or transferee has paid the amount, or turned over any such property for which such entity or transferee is liable under section ... 550 ... of this title."136 "Under § 502(d) the bankruptcy court may disallow a claim if the claimant has failed to pay money it owes the estate or turn over property of the estate. This provision is based on the policy that a creditor who fails to turn over to estate any money or property it owes to the estate, will not be entitled to share in the proceeds of the estate."137 To disallow a claim under section 502(d) requires a judicial determination that a claimant is liable.138 "[W]hen a trustee raises a preference objection to a creditor's claim, the very nature of the statutory scheme requires the bankruptcy court to adjudicate the preference matter before allowing or disallowing the claim."139 "The command of § 502(d) is clear: The preference dispute must be resolved in tandem with the claim objection."140

ii. Conclusion

The Court hereby denies summary judgment as to this allegation in the Complaint. If the Court finds that there is no valid equitable subordination or preferential payments, the Court can deny relief based on § 502(d) at that time.

J. Highland's Affirmative Defenses

Highland asserts various defenses to the causes of action set forth in the complaint (acquiescence,141 ratification,142 waiver and in pari delicto143).

Based on the Counts of the Complaint, it does not make sense that Broadstripe "acquiesced" or "ratified" Highland's dealings in these transactions. There are material and triable issues of fact. If Highland caused Broadstripe to terminate the Wave sale, those actions were not "acquiesced" or "ratified" by Broadstripe's subsequent entry into the First and/or Second Credit Agreements.

Highland also claims that the First and Second Lien Credit Agreements expressly waived any right to sue Highland for entry into those documents. This too does not make sense as the Plaintiff is asserting that (i) Highland manipulated the process by being on all sides of the transactions, and (ii) Highland left no alternative transactions available (either by blocking or withholding funding).

Lastly, Highland claims that the plaintiff cannot recover against a "non-insider" for wrongful conduct that the plaintiff participated in. Accepting the averments in the Complaint as "true" for the purposes of summary judgment, Highland is an insider. As such, this defense also fails.

CONCLUSION

The Court hereby denies the motion for summary judgment as to Counts One (recharacterization), Two (equitable subordination), Four (breach of duty of care), Five (breach of duty of loyalty), Six (aiding and abetting breach of duty of care), Seven (aiding and abetting breach of duty of loyalty), Eight (preference claims related to First Liens), Nine (preference claims related to Second Liens), Eleven (recovery of avoidance actions), and Twelve (Disallowance of Highland's claims pursuant to § 502(d)). The Court hereby grants the motion for summary judgment as to Count Three (alter ego).

The Court issued an order consistent with the findings set forth herein on May 3, 2010.144