OPINION1

KAREN B. OWENS, Bankruptcy Judge.

Before the Court is the Defendants' Motion For Partial Summary Judgment Limiting Any Recoveries To The Amount Necessary To Satisfy Allowed Creditor Claims2 (the "Capping Motion") filed in the above-captioned adversary proceeding commenced by plaintiff Alfred T. Giuliano (the "Trustee"), as the chapter 7 trustee for the estates of DSI Renal Holdings, LLC, DSI Hospitals, Inc., and DSI Facility Development, LLC (each a "Debtor" and together the "Debtors"). For the reasons set forth herein, the Court will grant the relief requested in the Capping Motion with respect to damages that may be awarded on account of Count 4 (Recovery of Transfers Under 11 U.S.C. § 550) but will deny the relief requested with respect to those that may be awarded on account of Counts 5 (Breach of Fiduciary Duty), 6 (Aiding and Abetting Breach of Fiduciary Duty), and 7 (Corporate Waste).

I. JURISDICTION

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a). As this Court held in the Dismissal Opinion (as defined herein), certain Counts of the Complaint are core proceedings while others are non-core.3 The Trustee demands a jury trial for all Counts of the Complaint. Neither the Trustee nor the Defendants consent to the entry of a final judgment or adjudication by this Court. Nonetheless, the Court has the authority to hear and enter an order on the Capping Motion.4

II. RELEVANT BACKGROUND

A. The Prepetition Restructuring and Sale of the Renal Business

The claims asserted in the Trustee's Complaint spring from a complex prepetition restructuring of Debtor DSI Renal Holdings, LLC ("DSI Renal Holdings") and certain of its subsidiaries (the "Restructuring"). Prior to the Restructuring, non-Debtor DSI Holding Company, Inc. ("DSI Parent") wholly owned the Debtors. DSI Parent's indirect subsidiaries owned substantially all of the operating assets of the enterprise, including a hospital in Bucks County, Pennsylvania and kidney dialysis clinics throughout the United States (the "Renal Business"). The hospital was owned by non-Debtor5 Bucks County Oncoplastic Institute, LLC ("Bucks County"), a subsidiary of Debtor DSI Hospitals Inc. The Renal Business was owned by non-Debtor DSI Renal, Inc. ("DSI Renal"), a wholly owned subsidiary of Debtor DSI Renal Holdings.

On January 11, 2010, the Restructuring was effectuated through a series of transactions as contemplated by and set forth in a Global Restructuring Agreement ("GRA") entered into by, among others, DSI Parent, DSI Parent's equity holders (including Defendants The Northwestern Mutual Life Insurance Company ("NML"), Apollo Investment Corp. ("AIC"), and certain Centre Defendants6),7 DSI Renal Holdings, DSI Renal, and the lenders under DSI Renal's credit facilities (including certain Centre Defendants, NML, Ares Capital Corp. ("ARCC"), and AIC).8 In sum, the following relevant events occurred to effectuate the Restructuring:

There is no dispute that each of the Restructuring transactions were part of an integrated transaction and that the effectiveness of each transaction was conditioned upon the substantially simultaneous consummation of each of the other transactions.

As a consequence of the Restructuring, DSI Renal Holdings ceased to wholly own and benefit from DSI Renal and its Renal Business. Rather, DSI Renal and its Renal Business became wholly owned by CDSI I, indirectly through its subsidiary CDSI II. DSI Renal Holdings held one share of CDSI I. Defendants Centre Defendants, NML, ARCC, and AIC, along with other non-Defendants, held the remainder.

A little over one year later, DaVita, Inc. ("DaVita"), a third-party who is not a Defendant, entered into a merger agreement with CDSI I. The transaction closed on September 2, 2011, with DaVita acquiring CDSI I for approximately $689 million (the "DaVita Acquisition"). The Defendants received in the aggregate approximately $440 million on account of, among other things, their shares in CDSI I and/or as repayment of DSI Renal's outstanding debt obligations.

B. The Bankruptcy Proceedings

On June 3, 2011 (the "Petition Date"), each of the Debtors filed in this Court voluntary petitions for relief under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code"). The Trustee was appointed as the chapter 7 trustee for the Debtors' estates and, on May 20, 2013, commenced this proceeding in the United States District Court for the Eastern District of Pennsylvania. Ultimately, it was transferred to the United States District Court for the District of Delaware and referred to this Court.

The gravamen of the Trustee's Complaint is that the Defendants — Messrs. Schnabel, Murphy, Pollack, Bergmann, and Yalowitz (together, the "D&O Defendants") (former officers and directors of entities affiliated with DSI Renal Holdings) and the Centre Defendants, NML, AIC, and ARCC — effectuated a fraudulent scheme leading up to and through the Restructuring that stripped the Debtors of substantially all of their valuable assets, namely the Renal Business, for little to no consideration and then turned around and sold those assets for over half a billion dollars. According to the Trustee, while the Defendants received hundreds of millions of dollars for their wrongful activity, the Debtors and their creditors were left with little except millions of dollars' worth of non-insider claims. Accordingly, the Trustee has asserted claims for the avoidance and recovery of fraudulent transfers as well as claims arising from breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste.9

The Defendants contest the Trustee's claims and allegations. However, the Court need not address issues of ultimate liability at this stage. Rather, the Capping Motion relates only to the extent of damages sought by the Trustee. Briefing on the Capping Motion is complete, oral argument was held on September 13, 2019, and the matter is ripe for decision.

III. SUMMARY OF THE PARTIES' POSITIONS

On account of his claims, the Trustee seeks damages in the amount of approximately $678 million, which represents the amount of DaVita Acquisition proceeds received by the Defendants plus interest as calculated by the Trustee. However, according to the Official Claims Register maintained in the Debtors' bankruptcy proceedings, only approximately $166 million of claims have been asserted against the Debtors to date. Accordingly, if the Trustee succeeds, it is likely that he will be able to pay all claims in full and have a substantial surplus for distribution to the Debtors and, ultimately, to DSI Renal Holdings' interest holders.10 This is an unusual circumstance for a chapter 7 proceeding and has led to the question before the Court. Namely, if the Trustee ultimately prevails on his claims in this proceeding, can he recover from the Defendants more than the total amount of the allowed claims asserted against the Debtors in their chapter 7 cases, thus enabling the Debtors to benefit from the surplus?

The Defendants assert that the Bankruptcy Code, applicable state law, controlling precedent, and equity preclude the Trustee from recovering in excess of creditor claims. Among other things, they rely on the plain language of section 550(a) of the Bankruptcy Code and the holdings of several decisions of the United States Court of Appeals for the Third Circuit, which the Defendants contend require avoidance recoveries to benefit creditors only. In addition, the Defendants argue that limiting the Trustee's recovery will avoid the inequitable and absurd result that will arise if recoveries are ultimately distributed to the Debtors' interest holders by way of the Debtors. Specifically, the Defendants contend that these recipients, who participated in and ratified the Restructuring, agreed under the GRA to return to the Defendants all proceeds received as a result of this proceeding. Accordingly, once creditors are paid in full, they assert that there is no remedy to be accomplished. The damages will be disbursed back to them but will be reduced by the Trustee's fee and those of his professionals. This, the Defendants assert, will only serve to penalize them and provide a windfall to the Trustee and his professionals. For similar reasons, the Defendants seek to cap recoveries on account the Trustee's state law claims.

The Trustee opposes the relief sought in the Capping Motion. While he agrees with the "unremarkable proposition" that debtors are not entitled to benefit from avoidance and that any attempt to do so must be curtailed so that only creditors benefit,11 he argues that this proceeding is distinguishable as he seeks avoidance as a chapter 7 trustee on behalf of the Debtors' estates. Moreover, relying extensively on the reasoning set forth in Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox, Inc.),12 the Trustee argues that recoveries are not limited by the amount of allowed creditor claims because section 550(a) requires only that avoidance proceeds provide, at minimum, some benefit to creditors. In other words, section 550(a) prevents a debtor from being the only beneficiary of an avoidance action but does not prevent a debtor from receiving surplus proceeds following satisfaction of allowed creditor claims. For the Trustee, section 550(a) establishes not a maximum recovery but rather, a minimum one that must provide some benefit to creditors. Accordingly, the Trustee contends that, pursuant to the United States Supreme Court holding in Moore v. Bay (In re Estate of Sassard & Kimball, Inc.),13 once the challenged transfer is avoided in its entirety, he is entitled to fully recover it (or the value thereof) to restore the Debtors' estates to their prior position regardless of the quantum of creditor claims.

IV. APPLICABLE LEGAL STANDARD

Rule 56 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that a court may grant summary judgment on whole or in part of a claim or defense "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."14 A material fact is one that "might affect the outcome of the suit under governing law."15 A dispute concerning a material fact is present "when reasonable minds could disagree on the result."16 The moving party bears the burden of demonstrating an entitlement to summary judgment.17

Summary judgment serves to "isolate and dispose of factually unsupported claims or defenses" and avoid unnecessary trial where the facts are settled.18 Thus, at the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.19 A court should view the facts and all permissible inferences from those facts in the light most favorable to the non-moving party.20 Any doubt must be construed in the non-moving party's favor.21

A moving party bears the initial burden of demonstrating the absence of a dispute of material fact.22 "[W]hen the moving party has met its burden . . . the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial."23 In other words, "the mere existence of some alleged factual dispute between the parties" cannot defeat a properly supported summary judgment motion.24 Rather, the dispute must relate to a genuine issue of material fact.25 Thus, a non-moving party cannot defeat a summary judgment motion based on conclusory allegations and denials, but instead must provide supportive arguments or facts that show the necessity of a trial.26

Summary judgment should be granted if, after drawing all reasonable inferences from the underlying facts in the light most favorable to the non-moving party, the court concludes that there is no genuine issue of material fact to be resolved at trial and the moving party is entitled to judgment as a matter of law.27

V. LEGAL DISCUSSION

In the Capping Motion, the Defendants request this Court to limit recoveries that may be obtained by the Trustee on account of his fraudulent transfer claims, on one hand, and his state law claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste, on the other. The Court will discuss the merits of each request below.

A. Limiting Recoveries Under 11 U.S.C. § 550(a)

Under the Bankruptcy Code, avoidance of a fraudulent transfer and recovery on account of such transfer are two separate concepts. "Specifically, after demonstrating the right to recover conveyances . . ., a trustee must then establish the amount of recovery under section 550(a) of the Bankruptcy Code. . . ."28 Accordingly, to decide the Capping Motion, the Court must assume that the Trustee will succeed in avoiding the alleged fraudulent transfers.

As a threshold matter, the Trustee argues that the Court's decision on the Capping Motion is an inappropriate advisory opinion that should be delayed until the record is fully developed at trial and notions of fairness and equity can be considered. However, the Court disagrees. The use of partial summary judgment here will streamline issues at trial and may enhance settlement possibilities.29 Moreover, while the Trustee's factual allegations are relevant to avoidability under sections 548 and 544, they are not for recovery under section 550(a).30

Section 550(a) provides in pertinent part that "to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of [the Bankruptcy Code], the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property. . . ."31 Numerous questions have been presented to courts regarding the import of section 550(a)'s phrase "for the benefit of the estate," including those with respect to a plaintiff's standing to exercise avoidance powers and the extent of recovery upon avoidance. The Third Circuit equates such phrase to mean "for the benefit of creditors" and has prohibited debtors from benefiting from the Bankruptcy Code's avoidance powers.32

While the Trustee asserts that this prohibition applies when a debtor is the only party who stands to benefit from an avoidance action33 and not in instances such as this proceeding where the Trustee is acting for the benefit of the estates and creditors will benefit, the Court disagrees. First, it is true that the Trustee is empowered to pursue the Bankruptcy Code's avoidance powers to maximize recoveries for the Debtors' creditors.34 But to decide whether to limit those recoveries, the Court must look to who will benefit from the recoveries and not who is bringing the action.

Second, there is no dispute that creditors stand to greatly benefit from recoveries the Trustee may obtain from his avoidance claims and that, if and when creditors' claims are paid in full from the recoveries, the Debtors will receive the available excess. However, under the facts and circumstances presented, the Court holds that the Debtors' receipt of such excess would be impermissible. As an initial matter, receipt of such funds would provide no accompanying benefit to creditors as they would have already received payment in full. Moreover, receipt would serve to give rights and value to the Debtors to which they were not entitled outside, nor were given inside, bankruptcy. If the Trustee were to prevail on the fraudulent transfer claims, the state law rights and obligations of the Debtors vis-à-vis the Defendants as a result of the Restructuring remain unchanged. They are neither entitled to avoid the Restructuring as a fraudulent transfer nor benefit from the Trustee's avoidance, and nothing in the Bankruptcy Code expands this lack of entitlement.35 Two Third Circuit cases cited by the Defendants in support of the relief requested — In re Messina36 and In re Majestic Star Casino, LLC v. Barden Development, Inc. (In re Majestic Star Casino, LLC)37 — are illustrative to the issue presented.

In Messina, chapter 7 debtors' residential property was fully encumbered by two mortgages as of the petition date, one of which was defective under state law.38 During the bankruptcy proceeding, the chapter 7 trustee avoided the defective lien, which resulted in unencumbered sale proceeds to which the debtors then sought to apply their section 522(d)(1) and (d)(5) exemptions.39 The trustee objected, contending that the exemptions were valueless given that the avoided mortgage remained valid as to the debtors.40 The Third Circuit agreed.41 To reach this conclusion, the Court held that the commencement of the debtors' chapter 7 proceedings did not create new property rights or value for the debtors in the fully encumbered property and, therefore, the debtors had no equity to exempt.42 For the debtors to obtain equity, they must have avoidance powers themselves or the ability to benefit from those of the trustee.43 The Third Circuit held that neither of these exceptions applied and, thus the exemptions were valueless.44

In Majestic, the bankruptcy court permitted reorganized debtors to avoid under section 549 a postpetition revocation of the "S" corporation status of a debtor's non-debtor, indirect parent.45 This revocation caused the debtor-subsidiary to lose its status as a qualified subchapter S subsidiary (a "Qsub") and subjected it to federal taxation.46 As a remedy following avoidance, the bankruptcy court ordered the reinstatement of the non-debtor parent's S-corporation status.47 On direct appeal, the Third Circuit vacated the lower court's decision.48 The Court held, inter alia, that under the Internal Revenue Code and related regulations the debtor did not have a property interest in its Qsub status and that, even if it did, the interest would belong to the non-debtor parent.49 Therefore, given that the bankruptcy laws did not alter or expand the debtor's interest in the asset, the Third Circuit opined that the debtor-subsidiary should not have been permitted to "stymie" legitimate transactions of its parent.50

"For similar reasons," the Third Circuit questioned the appropriateness of the non-debtor parent's tax status reinstatement as the avoidance remedy under section 550(a).51 The remedy was of infinite duration so it would benefit the reorganized debtors long after the debtor's secured creditors (who obtained membership interests in the reorganized debtors) were compensated and sold their interests.52 Accordingly, the Court determined that the relief ran afoul of limitations placed on the scope of available relief under section 550(a), including that "[a] debtor is not entitled to benefit from any avoidance[.]"53

The principles of Cybergenics, Messina, and Majestic have led this Court to conclude for the reasons set forth above that it is impermissible for the Debtors to receive any surplus avoidance recoveries obtained in this proceeding. Thus, the Court must fashion a remedy to avoid this result by capping the recoveries that might otherwise be available to the Trustee. Indeed, courts facing analogous circumstances to those currently presented have persuasively — and consistent with the Third Circuit's holdings — limited recoveries that would otherwise inure solely to the benefit of a debtor.54

As the Trustee correctly highlights, some courts have refused to impose caps on avoidance recoveries and even have permitted reorganized debtors to receive avoidance recoveries. However, those cases are distinguishable. In Tronox and similar cases, courts were tasked with deciding whether creditors may receive more than their allowed claims from avoidance recoveries.55 Moreover, in Trans World Airlines, Inc. v. Travellers International AG (In re Trans World Airlines, Inc.) and similar cases, courts were asked to decide whether reorganized debtors could pursue and benefit from avoidance actions and recoveries, with those permitting reorganized debtors to recover identifying a direct or indirect benefit for creditors achieved as a result of the recoveries, such as the furtherance of the reorganization effort or the indirect recovery of creditor claims.56 The circumstances of Tronox, Trans World Airlines, and the like are not present here.57 The Debtors' proceedings are ones under chapter 7. Creditors will not receive more than their allowed claims with interest, and there is no reorganized debtor to receive avoidance recoveries.

Similarly, the Trustee's reliance on the Supreme Court's decision in Moore is misplaced. In Moore, the Supreme Court addressed which creditors may benefit from avoidance and recovery rights that are derivative of "triggering creditors" under section 544. It also addressed the extent that a transfer may be avoided and recovered if the amount at issue is larger than the triggering creditors' claims. The Moore Court clarified that avoidance and recovery under section 544 is for the benefit of all creditors (not just triggering creditors) and that avoidance and recovery is not limited to the amount of triggering creditors' claims.58 These holdings are not relevant to the Court's decision to limit the Trustee's avoidance recoveries in this proceeding.

Accordingly, for the foregoing reasons, the Court holds that under the facts and circumstances presented, any recovery obtained by the Trustee on account of Count 4 must be limited to the total amount necessary to satisfy all allowed creditor claims and expenses in the Debtors' bankruptcy cases as provided for under section 726(a)(1)-(5). This includes allowed secured, administrative, priority, and general unsecured claims and, for the avoidance of doubt, the allowed compensation of the Trustee and his professionals.

B. Limiting Recoveries Under State Law

In support of limiting recoveries awarded for the Trustee's state law claims of breach of fiduciary duty, aiding and abetting fiduciary duty, and corporate waste, the Defendants contend that once all allowed creditor claims are satisfied, there will no longer be an injury to redress and no interest left to be satisfied. Specifically, they argue that the Debtors' interest holders (who stand to benefit from any distribution to the Debtors) participated in and ratified the Restructuring as parties to the GRA and are obligated to "carry out the purpose and intent" of the GRA and "refrain from taking any action which would frustrate the purposes and intent of" the GRA.59 Moreover, the Defendants assert that the holders are bound by an implied covenant of good faith and fair dealing and are legally barred from receiving any more than they already received in the Restructuring.60 The Trustee has not explained his opposition to the relief requested by the Defendants.

The Court agrees with the Defendants that under applicable Delaware law61 monetary damages cannot be awarded if there is no loss.62 However, the rights and obligations of the Debtors' interest holders vis-à-vis the Defendants should the Trustee succeed on his state law claims are unclear, and there has been no further justification offered to support limiting the Trustee's potential state law damages. Based on the record before it, the Court finds that the Defendants have not satisfied their burden under Rule 56 and will deny the relief they seek with respect to Counts 5, 6, and 7.

VI. CONCLUSION

For the reasons set forth herein, the Court will grant the relief requested in the Capping Motion only with respect to Count 4 (Recovery of Transfers Under 11 U.S.C. § 550). The remainder of the relief sought will be denied. An appropriate order will follow.

ORDER

For the reasons set forth in the accompanying Opinion dated February 4, 2020, the Defendants' Motion For Partial Summary Judgment Limiting Any Recoveries To The Amount Necessary To Satisfy Allowed Creditor Claims (Adv. D.I. 188) is hereby GRANTED in part and DENIED in part.