Based on the findings of fact and conclusions of law set forth in the attached Order, the Court hereby enters judgment in favor of Defendants Nicholas Peter Francis Earlam and Plexus Limited, Ltd. on all remaining claims in this adversary proceeding.
JOHN E. WAITES, Bankruptcy Judge.
This matter is before the Court following a trial on the complaint in the above-captioned adversary proceeding. The parties have expressly consented to this Court's entry of final orders and judgments. Therefore, the Court is permitted "to hear and determine and to enter appropriate orders and judgments."
1. On March 23, 2011, Plaintiffs commenced this adversary proceeding by filing a complaint asserting personal, state-law based claims against Defendants for piercing Debtor's corporate veil, alter ego, breach of fiduciary duty to creditors, breach of contract, fraud, negligent misrepresentation, civil conspiracy, tortious interference, promissory estoppel, and constructive trust.
2. On August 30, 2013, Defendants filed a Motion for Summary Judgment on all causes of action included in Plaintiffs' amended complaint. Plaintiffs thereafter filed a Motion for Partial Summary Judgment on their claims for breach of fiduciary duty to creditors and tortious interference on September 27, 2013.
3. As a result of certain amendments to the complaint, motions, and stipulations, the remaining Defendants at the time of the Court's consideration of the cross-motions included only Nicholas Peter Francis Earlam, Laurence Kirby, Plexus Cotton, Ltd. and Plexus Cotton USA, Inc. As further discussed in the Court's ruling upon the parties' cross-motions for summary judgment ("Summary Judgment Order"),
4. Plaintiffs are five cotton gins located in Alabama, Georgia, and North Carolina:
5. Roanoke Tar Cotton ("RTC") and Tri-County Gin, Inc. ("Tri-County") are the remaining two of the seven gins involved in the Ginner Contracts. RTC and Tri-County (collectively, "Assignor-Gins") are corporations, both organized under North Carolina law with their principal places of business located in North Carolina. Plaintiffs acquired by assignment the Assignor-Gins' interests in the claims at issue.
6. Debtor is a nominal defendant in this adversary proceeding. Debtor, as a corporation organized under South Carolina law with its principal place of business located in Columbia, South Carolina, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on March 18, 2010. At the time of trial and as of the date of this Order, Debtor's bankruptcy case is still pending.
7. Defendant Plexus Cotton, Ltd. ("Plexus Limited") is a foreign corporation organized under the laws of the United Kingdom with its principal place of business located in the United Kingdom, wherefrom Plexus Limited, under Earlam's leadership, engaged in the international cotton trade. Plexus Limited was the majority shareholder of Debtor prior to its bankruptcy filing and Debtor functioned as its overseas subsidiary.
8. Debtor, Plexus Limited, and Debtor's wholly-owned subsidiary, Plexus Cotton USA, Inc., were members of a cooperative of businesses referred to by the parties as the Plexus Group. These entities also engaged in joint marketing efforts to advance the Group's business interests.
9. Nicholas Peter Francis Earlam ("Earlam") and Laurence Kirby are the two remaining individual Defendants and both are residents of Liverpool, United Kingdom. During the relevant time period, Earlam served Plexus Limited as the chairman of its board of directors and as a high-level executive manager. Earlam also served on Debtor's board of directors, becoming its chairman on or around October 6, 2008.
10. During the time relevant to these proceedings, Debtor's board of directors was comprised of five individuals. Three representatives of Plexus Limited—Mark English, Laurence Kirby, and Earlam—served on Debtor's five-person board of directors. Forester Adams ("Adams") and Edward Clarke ("Clarke")
11. Albrecht Mueller-Pearse ("Albrecht") was a German corporation which shared an established business relationship with the Plexus Group and Earlam. Albrecht went into German insolvency proceedings and receivership in February of 2009 and its assets have since been liquidated. Two of Albrecht's subsidiaries, Friedrich W. Kaemena & Company ("Kaemena") and Hong Kong Cotton Company ("HKC"), remained viable enterprises after the liquidation. Fritz Grobien ("Grobien") served as a managing partner at Albrecht during the time leading up to Albrecht's entrance into insolvency proceedings and maintained a close professional and personal relationship with Earlam spanning over twenty years.
12. At all relevant times, the following parties held an ownership interest in the following entities: (1) Plexus Limited held a 57% share of Debtor, positioning it as Debtor's controlling majority shareholder; (2) Earlam held a 36.5% share of Plexus Limited; (3) Mrs. Earlam held a 23.8% share of Plexus Limited which, combined with her husband's interest, provided the couple with a 60.3% controlling majority share of the entity; (4) Albrecht held a 31.4% share in Plexus Limited; (5) Earlam held a 7% share of Albrecht; and (6) Kaemena and HKC (collectively, "Subsidiaries") were 100% wholly-owned subsidiaries of Albrecht. Additionally, as part of Albrecht's insolvency proceedings, its shares in the Subsidiaries and Plexus Limited were ultimately purchased by Grobien from the insolvency receiver.
13. On September 25, 2014, the Court entered the Summary Judgment Order which denied certain of Plaintiffs' and the Assignor-Gins' causes of action in favor of all or some Defendants. After entry of the Summary Judgment Order, the following causes of action remained to be heard at trial:
14. On January 15, 2015, the Court entered an Order Setting Trial Date, which scheduled the trial in this proceeding to begin on April 13, 2015. Shortly thereafter, the Court entered an Order Requiring Parties to Submit a Joint Pretrial Order with a deadline for submission of March 19, 2015 and the requirement that any and all pretrial motions be submitted by or before the same date. In compliance with this deadline, the parties submitted multiple motions in limine which were heard by the Court on April 1, 2015 and April 6, 2015. The parties' proposed joint pretrial order was submitted to the Court on March 19, 2015 and entered by the Court on April 9, 2015 following a period of review and revision. The trial began on April 13, 2015 as scheduled.
15. During trial, Defendants moved for a judgment as a matter of law pursuant to Federal Rule of Civil Procedure 52(c), which is made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7052, as to (1) Plaintiffs' various claims for fraud, negligent misrepresentation, and promissory estoppel based on statements made by Earlam, individually and/or on behalf of Plexus Limited based upon the absence of proof of reliance and causation; (2) Plaintiffs' claims for breach of fiduciary duty to creditors by Earlam due to a failure to prove causation and damages; (3) the Assignor-Gins' remaining claims for breach of fiduciary duty to creditors on the grounds that Plaintiffs were incapable of proving the Assignor-Gins' damages based upon the absence of testimony from relevant corporate representatives; and (4) Plaintiffs' claims for breach of fiduciary duty to creditors by Laurence Kirby due to Plaintiffs' failure to provide evidence showing that Laurence Kirby acted to prefer himself or other creditors over Plaintiffs. The first two motions were taken under advisement but are now made moot by the Court's decision as reflected in this Order. Defendants' third motion was denied as to the Plaintiffs' ability to continue to assert on the Assignor-Gins' behalf their claims for breach of fiduciary duty to creditors. Defendants' fourth motion was granted in favor of Defendant Laurence Kirby in light of Plaintiffs' failure to present any evidence in relation to his intent to prefer himself or other creditors.
16. At the conclusion of the trial, the matter was taken under advisement and the Court requested that counsel for the parties provide the Court with a finalized list of exhibits to be considered in the Court's ruling, the contents of which were made a matter of record on June 19, 2015 through the Court's entry of a supplemental order with the parties' consent modifying the earlier joint pretrial order. Therefore, this Order considers only those exhibits included in the joint pretrial order which are not otherwise identified as withdrawn in the June 19
17. Between July 10, 2007 and March 5, 2008,
18. In March and April of 2008, fluctuations in the futures market and other issues and unpredictable activity in cotton commodity pricing prompted Debtor to borrow funds from Plexus Limited to satisfy margin calls
19. In the spring of 2008, around the same time that Debtor obtained the aforementioned loans from Plexus Limited, Adams began discussing with Grobien the possibility of arranging a sale of cotton from Debtor to Albrecht which would function to offset Debtor's obligations under the Ginner Contracts and replace Debtor's futures positions used for the same purpose which were put at risk by fluctuations in the market during the prior months. Such an offsetting contractual commitment is known as a "hedge"
20. On April 1, 2008, Adams emailed Dave McCarthy and Earlam separately to confirm having reached an agreement with Albrecht on either March 3, 2008 or March 4, 2008 for Albrecht's purchase from Debtor of 61,000 bales of cotton on a specified future date ("Contract 8001"). Adams' emails to Dave McCarthy and Earlam are practically identical with the exception of the discrepancy in dates for the formation of Contract 8001 (March 3 versus March 4, respectively) and the reference in the McCarthy email to an "initial payment" due from Albrecht forty-five (45) days from April 1, 2008 with the Earlam email referring to the same payment as a "provisional payment."
21. The specific terms of Contract 8001 provided for Albrecht's purchase of 61,000 bales of "2008/2009 crop" cotton from Debtor, which encompassed the 51,825 bales of 2008/2009 new crop cotton Debtor was to purchase from the Ginners. Per the Contract's terms, the price for 45,090 bales of the cotton to be sold was fixed based on the market price for cotton on the earlier date of March 4, 2008. Additional price fixations occurred on March 5
22. The parties agree that Contract 8001 was relied upon by Debtor as a physical hedge against the Ginner Contracts. This position as supported by testimonial evidence, the express terms of Contract 8001, and a provision common to all of the Ginner Contracts ("Hedge Clause"), the terms of which are discussed further below. As to the Contract's express terms, Contract 8001 provided for "prompt delivery" of the cotton, which would have required Debtor to deliver the contracted cotton to Albrecht within two to three weeks after Debtor obtained warehouse receipts from the Ginners for the cotton purchased under the Ginner Contracts. The evidence at trial demonstrated that the close proximity in time between Debtor's obtaining of warehouse receipts from the Ginners and Debtor's subsequent "prompt delivery" to Albrecht was a key component of Contract 8001's ability to offset the Ginner Contracts and Debtor's obligations thereunder. Additionally, each of the Ginner Contracts contained the aforementioned Hedge Clause, which reflected Debtor's intent to have in place the sort of offsetting commitment embodied by Contract 8001:
23. Representatives of Plaintiffs testified at trial that Earlam, Clarke, and Adams repeatedly assured them in the summer and/or fall of 2008 that Debtor had in place a contract with a foreign buyer that would function to offset the Ginner Contracts. The testimony was unclear as to when, if at all prior to the start of litigation, any of the Ginners became aware that Albrecht was the foreign buyer of which Debtor's representatives spoke at that time and that Contract 8001 (or, potentially. the later-executed Subsidiary Contracts, as discussed below) was the memorialization of the agreement as referenced by Earlam and the others and alluded to by the Hedge Clause.
24. On April 9, 2008, Earlam sent an email to Grobien regarding Contract 8001 which stated in pertinent part that "Plexus will write a letter to [Albrecht] saying that they take over all obligations of this contract. . . ."
Grobien's trial testimony indicated that this letter was kept in a safe at Albrecht's office after receiving it from Earlam.
25. Despite the Plexus Limited Agreement's express reference to responsibility for the "performance" of Contract 8001 itself, Earlam testified at trial that liability under the Agreement would only arise if Albrecht incurred a loss in selling the cotton after performing its obligations to purchase the contracted cotton from Debtor; this form of loss has been referred to regularly by the parties as "trading losses." At trial, Grobien and Defendants' foreign law expert, Veronique Buehrlen,
26. In the summer of 2008, during the months following the execution of Contract 8001, Clarke visited several of Plaintiffs' respective places of business to discuss the Ginner Contracts and check on the progress with the 2008/2009 crop cotton. The testimony of Clarke as well as representatives of Plaintiffs at trial indicated that at these meetings Clarke suggested that Plaintiffs consider placing some or all of the contracted cotton into a government-subsidized loan program to ensure and protect their payment for the cotton. Although Clarke contends this recommendation was made only in light of volatile market conditions, extreme and unpredictable price decreases, and a desire to protect Plaintiffs, the testimony of representatives of Plaintiffs indicated that such a recommendation by Clarke raised in their minds some concern as to Debtor's future ability to perform under the Ginner Contracts.
27. In the early fall of 2008, Laurence Kirby informed Earlam that the Plexus Limited Agreement would need to be reflected as a contingent liability on Plexus Limited's books unless it was replaced with a new agreement under which liability would be placed on an individual or entity other than Plexus Limited. According to Earlam's testimony at trial, Laurence Kirby indicated that the Plexus Limited Agreement would have required some sort of approval or authorization from Plexus Limited's board of directors to remain effective. There was additional testimony that such a significant contingent liability may also have drawn sharp criticism from Plexus Limited's board, particularly with regard to whether Earlam possessed the proper authority to execute such an Agreement on the corporation's behalf without prior approval. It is unclear following the trial whether Grobien was ever made aware of potential issues with the Plexus Limited Agreement's enforceability and effectiveness absent board approval. Considering that the Agreement was housed in a safe at Albrecht's place of business, the evidence indicates that Grobien viewed it as a binding commitment between Plexus Limited and Albrecht.
28. According to Earlam, the shifting of liability away from Plexus Limited was accomplished by a verbal agreement between himself and Grobien in September of 2008 in which Earlam elected to take on personal liability in relation to Contract 8001 ("Verbal Earlam Agreement"). However, the parties disagree as to the specific level and timing of the liability Earlam assumed. Plaintiffs have argued throughout this litigation that the Verbal Earlam Agreement mirrored the scope of the Plexus Limited Agreement; all that changed between the two was the party responsible for performance, as requested by Laurence Kirby. Additionally, Plaintiffs have argued that the terms of the Verbal Earlam Agreement were the same as those later memorialized on December 23, 2008, and not of the limited scope about which Earlam first testified at trial. Prior to trial, Earlam made no mention in his deposition testimony or elsewhere that the Verbal Earlam Agreement differed in scope from the later-discussed December 23
29. The evidence indicates that at least as early as September 27, 2008, Debtor was aware of Albrecht's desire to renegotiate Contract 8001.
30. At the October 6, 2008 special board meeting, Earlam, Laurence Kirby, Adams, and Clarke unanimously voted
31. On October 7, 2008, Debtor executed contracts with Albrecht Subsidiaries Kaemena and HKC, effectively replacing Contract 8001. As requested by Albrecht, Contract 8001's purchase obligations were split between the Subsidiaries and Contracts 8001A and 8001B were thereby executed ("Subsidiary Contracts").
32. On various dates in fall of 2008, Earlam and other members of Debtor's board communicated with representatives of Plaintiffs
33. Near the time of the fall 2008 meetings with representatives of Plaintiffs, Debtor circulated a proposed addendum to certain of the Ginner Contracts that, if accepted, would delay performance, shift the Ginners' delivery timeframe forward to January through July 31, 2009 (a time period more in line with that set forth for Kaemena and HKC's purchases under the Subsidiary Contracts), and delay Debtor's obligation to accept and pay for the contracted cotton. Ultimately, this addendum was withdrawn at a meeting held at Debtor's Columbia, South Carolina headquarters on October 26, 2008. Trial testimony consistently indicated that the addendum's withdrawal was due to ongoing market fluctuations and Debtor's doubts that it could perform at all. A specific example relating to impending issues with Debtor's performance was discussed in the trial testimony of Linda Exum and Van Murphy, two representatives for Plaintiff BCT. BCT attempted to deliver a portion of the cotton it contracted to sell to Debtor prior to the Ginner Contracts' January 15, 2009 deadline for delivery but it was rejected by Debtor. After Debtor accepted and paid for 100 bales from BCT, Debtor subsequently rejected a second shipment of another 100 bales.
34. The evidence indicates that further delivery by BCT and initial deliveries by other Plaintiffs were not attempted because of representations made by members of Debtor's board, including Earlam, at the fall 2008 meetings stressing a need for delayed delivery to assist Debtor in its efforts to fully perform in light of outstanding inventory issues and the timeline provided to Debtor by a foreign buyer.
35. On November 4, 2008, a letter was sent to Adams by counsel at the law firm of Nexsen Pruet on behalf of Arabi, Jones County, RTC, and Coley.
(emphasis in original).
The letter also requests a meeting with Debtor and its representatives within ten (10) days at which time Debtor would disclose the requested information. There is no evidence in the record that this meeting took place or that the requested disclosures were ever provided to the satisfaction of the Ginners.
36. On December 17, 2008, Debtor's primary lender, BB&T, formally asserting a default under an applicable lending agreement between it and Debtor, significantly restricted Debtor's credit availability, and forced Debtor to begin liquidating some of its assets and winding down its business. According to Dave McCarthy, Debtor's default under the terms of its credit line with BB&T came about as a result of Debtor's failure to maintain its physical cotton inventory with no more than 10,000 unhedged bales.
37. On December 23, 2008, the aforementioned Verbal Earlam Agreement was memorialized by Earlam in two separate writings ("December Earlam Agreements"). The December Earlam Agreements were entered into by Earlam with the Subsidiaries and the Subsidiaries' directors as well as Albrecht, despite the fact that Contract 8001 was no longer in effect following the October 6, 2008 meeting and vote of Debtor's board of directors. The December Earlam Agreements were secured by shares of Plexus Limited stock owned by Earlam and his wife, who together stood as its majority shareholders.
38. The December Earlam Agreements provided promises consisting of language of similar effect to that of the Plexus Limited Agreement. Specifically, the December Earlam Agreements, if enforced against Earlam, would have imposed liability on him for "any loss incurred" either by Albrecht as a result of entering into Contract 8001 or by the Subsidiaries as a result of entering into Contract 8001A and 8001B, the Subsidiary Contracts. The December Earlam Agreement with Albrecht stated, in pertinent part:
Similarly, the December Earlam Agreement with the Subsidiaries and their directors stated, in pertinent part:
The scope of the Verbal Earlam Agreement provided to Albrecht in September prior to the October 6
39. On January 12, 2009—three days before the Ginner Contracts' deadline for delivery—Plaintiffs received formal notice from Debtor that it would not be able to perform.
40. On January 19, 2009, shortly after receiving notice of nonperformance, another letter was issued from counsel for Plaintiffs.
According to the letter, the foregoing statements were "[b]ased on the conversations that have taken place between [Debtor] and these Gin[ner]s. . . ."
41. Immediately following the January notice of Debtor's inability to perform the Ginner Contracts, Plaintiffs began to seek alternative buyers for certain portions of the contracted cotton and maintained their relationship with previously retained counsel for the purpose of attempting to seek performance by Debtor. This is supported by the statements contained in the January 19
42. After receiving notice of Debtor's inability to meet its contractual obligations under the Ginner Contracts, the Ginners filed an arbitration complaint on or around February 25, 2009, with the American Cotton Shippers Association ("ACSA") against Debtor and Plexus Limited claiming a loss of $11,973,472.67 arising from Debtor's non-performance. The ACSA determined it did not have jurisdiction over Plexus Limited, but continued in the proceedings against Debtor. Debtor filed a response to the Ginners' complaint, admitting liability but disputing the amount of damages sought.
43. While the ACSA arbitration was pending, Debtor remained in contact with Albrecht in an attempt to receive assurances of performance from its Subsidiaries under the Subsidiary Contracts. Despite Albrecht commencing an insolvency proceeding in February of 2009, Grobien informed Debtor that Albrecht's wholly-owned Subsidiaries planned to rely on the Contracts' terms allowing shipment to be requested from Debtor as late as October of 2009 at the Subsidiaries' option. The Ginners also attempted, albeit unsuccessfully, to directly contact the Subsidiaries about their intent to perform. Ultimately, Grobien, with the input of Earlam, informed Debtor that Albrecht was unwilling to entertain any further discussion about the performance of the Subsidiary Contracts.
44. On or around May 8, 2009, the ACSA arbitration committee ("Committee") rendered a damages award of $10,687,356.42 against Debtor upon its finding that Debtor breached the Ginner Contracts on January 12, 2009. Each Plaintiff and Assignor-Gin filed a Proof of Claim in Debtor's bankruptcy proceeding using the Committee's award as the basis for its claim against Debtor.
45. Subsequent to Debtor's filing for relief under the Bankruptcy Code, the Chapter 7 Trustee, on behalf of Debtor's bankruptcy estate, initiated additional arbitration proceedings before the International Cotton Association ("ICA")—with supporting affidavits provided by representatives of the Ginners—and sought to enforce the Subsidiary Contracts. Documents provided by the Trustee in support of the ICA claims against the Subsidiaries revealed repeated attempts throughout 2009 (after Debtor's notice to the Ginners of its inability to perform the Ginner Contracts) by Debtor and the Ginners to enforce the Subsidiary Contracts and communicate with Albrecht, Kaemena, and HKC about the performance of the Subsidiary Contracts.
46. On June 17, 2011, the ICA arbitration panel rendered an award and held that the Subsidiary Contracts were valid and enforceable. However, because cotton was never actually delivered to the Subsidiaries by Debtor, the ICA panel did not issue a monetary award for contract damages and instead required the Subsidiaries to "invoice back" to Debtor the cotton pledged to be purchased.
As a result of the Court's ruling in the Summary Judgment Order, the following claims remained before the Court for consideration at the time of trial:
Plaintiffs, as the proponents of the foregoing claims, were required at trial to prove each element of each claim by a preponderance of the evidence. "A preponderance is such proof as leads the trier of fact to find that it is more probable than not, or more likely than not, that a contested fact exists." 32A C.J.S. Evidence § 1628 (2015); see also 75A Am. Jur. 2d Trial § 1152 (2015) ("A proper definition [of `preponderance of the evidence'] suggests a comparison of the convincing power of evidence on one side with that upon the other, and a determination of which outweighs the other as to the probabilities."). Therefore, it was incumbent upon Plaintiffs to present to the Court, as the finder of fact in a bench trial, evidence sufficient to satisfy this standard with respect to each individual Plaintiff and the specific elements of law applicable to each individual Plaintiff's various claims.
"Bankruptcy courts adjudicating a state law claim should apply the choice of law rules of the forum state in the absence of federal policy concerns." In re Hydrogen, L.L.C., 431 B.R. 337, 346 (Bankr. S.D.N.Y. 2010); see also In re Merritt Dredging Co., 839 F.2d 203, 205-06 (4th Cir. 1988). As discussed in the Summary Judgment Order, South Carolina is the forum state; therefore, South Carolina choice of law principles must be applied to Plaintiffs claims as presented at trial.
As to Plaintiffs' claims that Earlam, as a corporate officer of Debtor, breached his fiduciary duties to Plaintiffs, as creditors of Debtor, South Carolina law controls because Debtor is incorporated in this State.
Various Plaintiffs presented their claims against Earlam and/or Plexus Limited for tort-based causes of action arising from statements allegedly made by Earlam during his visits to Plaintiffs' respective places of business in the fall of 2008. Plaintiffs' array of fraud and negligent misrepresentation claims are governed by the substantive law of the state in which their respective injuries occurred. See Nash v. Tindall Corp., 375 S.C. 36, 39, 650 S.E.2d 81, 83 (Ct. App. 2007) ("Under traditional South Carolina choice of law principles, the substantive law governing a tort action is determined by the lex loci delicti, the law of the state in which the injury occurred.") (quoting Boone v. Boone, 345 S.C. 8, 13, 546 S.E.2d 191, 193 (2001)). As a result, the law applicable to any fraud and negligent misrepresentation claims remaining at the time of trial is that of the state in which each particular Plaintiff suffered its purported financial losses. Therefore, the Court considers its decision on such claims under Alabama law with respect to Henry County; Georgia law with respect to Arabi, BCT, and Coley; and North Carolina law with respect to Jones County. Additionally, Henry County was the only Plaintiff to present a claim of promissory estoppel at trial based on the aforementioned statements by Earlam. Henry County's state law based claim for promissory estoppel against Plexus Limited is governed by the laws of Alabama. See Ford v. Jackson Square, Ltd., 548 So.2d 1007, 1012-13 (Ala. 1989) (setting forth elements of promissory estoppel under Alabama law).
Plaintiffs contend that by voting to modify Contract 8001 during a time at which Debtor was insolvent or in a failing condition, Defendant-directors Earlam and Kirby
The existence of a fiduciary duty under Sea Pines and its progeny first turns on the issue of Debtor's solvency. As a prerequisite to the shifting of the Defendant-directors' fiduciary duties to its creditors (rather than solely to the corporation they serve and its stockholders), Plaintiffs were required to demonstrate by a preponderance of the evidence that Debtor was insolvent, in a failing condition, or at least approaching insolvency at the time of the alleged preferential action. See, e.g., Sea Pines, 692 F.2d 973; Poth, 281 F.Supp.2d 814; In re BHB, 1998 WL 2016846, at *13 (referring to shifting of duties upon insolvency). "Because insolvency turns on complicated (and debatable) facts, a debtor and its creditors may disagree on whether the moment of insolvency has arrived." Michael M. Krauss & Abby E. Wilkinson, Digging Deeper: Damages When an Insolvent Corporation Plunges Further into Debt, JNL. OF BANKR. L. 2008.10-2. Earlam's expert Loretta Cross testified that Debtor was solvent on October 6, 2008, the date of the board vote regarding Contract 8001. Plaintiffs did not present an expert on solvency and instead relied on evidence of events and circumstances leading up to and shortly after October 6, 2008 to demonstrate that Debtor was in a failing condition or at least approaching insolvency by the time of the board's vote. The following facts regarding Debtor's financial condition were presented: (1) Debtor incurred margin calls in the spring of 2008 which required financing from Plexus Limited; (2) Debtor experienced issues with its futures positions in the spring of 2008 which prompted Adams to enter into discussions with Grobien to establish a physical hedge to offset the Ginner Contracts in the absence of the earlier-held futures positions; (3) During the summer of 2008, Clarke visited Plaintiffs and offered the suggestion that the Ginners begin considering placing the contracted cotton into a government-subsidized loan program to protect them from losses; (4) Debtor, in various meetings at Plaintiffs' respective places of business in the summer and fall of 2008, indicated through verbal representations by Adams, Clarke, and/or Earlam that it would be unable to perform the Ginner Contracts absent delayed delivery; (5) Debtor failed to pay Plexus Limited certain fees owed for its role in advising and consulting Debtor for the months of August of 2008 through March of 2009; (6) Prior to the October 6
Plaintiffs' breach of fiduciary duty to creditors claim also requires a showing that Defendant-director Earlam breached the duties he owed to the Ginners which arose upon Debtor's failing financial condition. See Turpin, 404 S.C. at 589, 745 S.E.2d at 401. Under Sea Pines, the existence of a breach requires a two-part inquiry: (1) Whether a transfer of corporate property occurred with the replacement of Contract 8001 and the transfer of its purchase rights and obligations to the Subsidiaries; and (2) whether such a transfer resulted in a preference to Earlam and/or another of Debtor's creditors. Sea Pines, 692 F.2d at 977. The corporate property to be considered in this case are Debtor's rights under Contract 8001 and the question of any resulting preference centers on Earlam's exposure to personal liability under the Earlam Agreements.
As determined in the Summary Judgment Order and reinforced through the evidence provided at trial, the replacement of Contract 8001 constituted a "transfer of property" under the relevant standard for this cause of action. Debtor's rights arising under Contract 8001, precisely its right to payment from Albrecht and the Contract's requirement of "prompt delivery" which controlled the timing of payment, were assets of the corporation. Plaintiffs showed by a preponderance of the evidence that the October 6, 2008 board vote effectively eliminated Debtor's ability to receive payment under Contract 8001 through substitution of Albrecht's purchase obligations with those of its Subsidiaries. Upon the substitution, Debtor was contractually unable to collect payment upon the delivery of the subject cotton until March of 2009, at the earliest, and potentially as late as October of 2009 due to the provision in the Subsidiary Contracts giving the Subsidiaries the exclusive control over the delayed delivery timeframe. Plaintiffs successfully demonstrated that this delay in Debtor's contractual ability to facilitate a timely offsetting sale of the cotton contracted to be sold to Debtor by Plaintiffs
The term "preference" in this context has been viewed to mean a transfer of a corporate asset (Contract 8001)—made while the subject corporate entity was insolvent or operating in a failing condition—which had the effect of allowing a corporate insider or director to (1) recover a greater percentage of his debt than other creditors of the corporation, or (2) otherwise limit his liability on other obligations related to the corporation's business. See, e.g., Helm Fin. Corp. v. MNVA R.R., Inc., 212 F.3d 1076, 1081 (8th Cir. 2000); Bank of Am. v. Musselman, 222 F.Supp.2d 792, 799-801 (E.D. Va. 2002) (reviewing importance of allegations of preferential action and self-dealing by directors in viable claims for breach of fiduciary duty to creditors); Synder Elec. Co., 305 N.W.2d at 869. The term does not necessarily require ill motive or design.
18B Am. Jur. 2d Corporations § 1856; see, e.g., BHB, 1998 WL 2016846 at *13 ("When there is a question as to whether a director has fulfilled his fiduciary obligations to creditors, the issues of the director's reasonableness and good faith are irrelevant, as is the severity of the breach; the only issue is whether there has been a breach at all.") (citing Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745 (Ct. App. 1995)).
According to its terms, the Plexus Limited Agreement provides broad protection to Albrecht, likely ensuring performance which served to benefit Debtor and its creditors. In his deposition, Earlam testified that prior to October 6, 2008, only the Plexus Limited Agreement was memorialized in writing and that the Plexus Limited Agreement was replaced with the Verbal Earlam Agreement given to Albrecht during a conversation between Grobien and Earlam as early as September of 2008. The tenor of that testimony demonstrated that the creation of the Verbal Earlam Agreement was motivated by a desire to avoid review by Plexus Limited's board of directors and served to change the party which would be liable, not the terms. This reasoning is substantiated by Earlam's actions in the final weeks of 2008 in memorializing the written December Earlam Agreements. At trial, however, Earlam testified that the scope of the Verbal Earlam Agreement only covered "trading losses," which could only be incurred after Albrecht received and later sold the subject cotton at a loss, and thus was far narrower than the plain language of the Plexus Limited Agreement and the later-memorialized December Earlam Agreements.
Even if the Court were to assume Earlam's trial testimony to be true, why would Earlam on December 23, 2008 execute a broader promise to Albrecht involving greater exposure to liability than that which he claims was created by the Verbal Earlam Agreement in September of 2008, particularly considering that Contract 8001 (according to Earlam's own testimony) was not previously performed and considered to be fully replaced by the Subsidiary Contracts and no longer binding on Debtor or Albrecht after the October 6, 2008 board vote? It seems more credible to accept the December Earlam Agreements as the memorialization of the same promise provided in the earlier Verbal Earlam Agreement as spoken to Grobien.
Regardless, whether Earlam would be liable for "any loss" suffered by Albrecht or its Subsidiaries or only "trading losses" is not determinative to the finding of a preference if, as the Court believes upon its review of the evidence, Earlam sought, at least in part, to limit his exposure to liability in either form by releasing Contract 8001. It is undisputed that the effect of the October 6, 2008 board vote was to allow for a delay in the obligation to purchase the subject cotton from Debtor in hopes of an improvement in market conditions. The delay of the purchase effectively delayed Earlam's personal exposure to any loss incurred by the purchaser "as a result of . . . having entered into the Contract. . . ." Considering Earlam's state of knowledge and his failure to disclose the Verbal Earlam Agreement with Albrecht to the other members of Debtor's board of directors, plus his inconsistent testimony on the nature of the Earlam Agreements collectively, the Court is led to conclude that Earlam acted, at least in part, to protect his personal interests, effectively putting them ahead of those of Debtor and its creditors. Earlam's actions, through the use of his insider position (as not only a dual-director but also as a close friend and business associate of Grobien) and his special knowledge of the relevant entities' financial statuses as well as Debtor's financial strain at the time surrounding the October 6
To establish liability for Earlam's breach of fiduciary duty, Plaintiffs were required to show that their damages were proximately caused by Earlam's actions regarding the replacement of Contract 8001, for which Earlam had potential liability to Albrecht under the Earlam Agreements. The evidence at trial indicated that Plaintiffs' damages were proximately caused by Debtor's breach of the Ginner Contracts due to its inability to purchase the Ginners' cotton—an inability unrelated to the replacement of Contract 8001. The preponderance of evidence shows that Debtor lacked the ability to accept and pay for the cotton contracted to be sold to it by Plaintiffs during the periods for performance set forth in the Ginner Contracts.
As discussed in relation to the issue of Debtor's solvency at the time of the October 6
Because Debtor's breach of the Ginner Contracts—which, as Plaintiffs have repeatedly agreed, caused the damages alleged in this action—was not proximately caused by Earlam's efforts to prefer himself by replacing Contract 8001, Plaintiffs cannot succeed on their claims against Earlam for a breach of fiduciary duty to creditors and judgment is appropriate in favor of Defendants. The Court is not convinced that Debtor's loss of Contract 8001 was the proximate cause of Plaintiffs' damages in light of other factors and finds Plaintiffs failed to meet their burden of proof. Therefore, in the absence of proof of proximate cause, the Court must find in favor of Defendant Earlam as to all Plaintiffs' claims for breach of fiduciary duty.
At trial, the following causes of action were asserted based on statements Earlam allegedly made during various visits to Plaintiffs' respective cotton gins in October of 2008: (1) fraud claims against Earlam personally, brought by Arabi, BCT, Coley, and Jones County; (2) fraud claims against Plexus Limited, brought by BCT, Coley, Henry County, and Jones County; (3) negligent misrepresentation claims against Earlam personally, brought by Arabi, BCT, and Coley; (4) negligent misrepresentation claims against Plexus Limited, brought by Arabi, BCT, and Coley; and (5) a promissory estoppel claim against Plexus Limited, brought by Henry County.
Representatives of Plaintiffs offered testimony at trial which was identical to that offered during their prior depositions on this subject.
Plaintiffs' separate causes of action for fraud, negligent misrepresentation, and promissory estoppel under the state laws of Alabama, Georgia, and North Carolina each require proof of a particular form or level of reliance on the "stand behind" statements as a prerequisite for their recovery of damages against Earlam and/or Plexus Limited. See Sykes v. Payton, 441 F.Supp.2d 1220, 1223 (M.D. Ala. 2006) ("`[T]he gravamen of the claim of promissory estoppel [in Alabama] is detrimental reliance.'") (quoting Wyatt v. BellSouth, Inc., 18 F.Supp.2d 1324, 1325 (M.D. Ala. 1998)) (alterations in original); Wingate Land, LLC v. ValueFirst, Inc., 722 S.E.2d 868, 869-70 (Ga. Ct. App. 2012) (allowing for liability to attach to third parties for negligent misrepresentation only "[i]f it can be shown that the representation was made for the purpose of inducing third parties to rely" and the "reliance by the third party [was] justifiable"); Saia Food Distribs., 902 So.2d at 57 (listing reasonable reliance as an essential element of fraud claims under Alabama law); Helms, 478 S.E.2d at 517 (listing justifiable reliance as "an essential element of . . . fraud"); Crawford, 375 S.E.2d at 224 (requiring proof of "justifiable reliance by the plaintiff" for viable action for fraud under Georgia law). The Court finds that Plaintiffs did not meet their burden of proof on this issue.
While the reliance elements within Plaintiffs' various representation claims differ slightly, the overall theme and baseline standard is essentially the same: Reliance, in a general sense, is evidenced by "dependence or trust by a person, esp[ecially] when combined with action based on that dependence or trust." Black's Law Dictionary (10th ed. 2014). The testimony from the various representatives of Plaintiffs at trial made clear that while Plaintiffs may have taken and/or limited certain actions or delayed delivery to some degree under the terms of the Ginner Contracts due to statements from agents of Debtor regarding Debtor's ability to perform, the evidence does not support the allegation that Plaintiffs' actions or lack thereof were caused by their reliance on any promise that Plexus Limited and/or Earlam stood behind the performance of the Ginner Contracts. The November 4
The evidence indicates that Plaintiffs had collectively discussed Debtor's situation as they understood it based on several separate meetings with Clarke, Adams, and/or Earlam and thereafter sought out legal representation as a group. The November 4
Even if the Court were to accept Plaintiffs' argument that the boilerplate letter language constituted a reference to Earlam and/or Plexus Limited, the Court is not persuaded that the actions or inaction by Plaintiffs taking place during the same time period suggest reliance on the "stand behind" statements. Specifically, the actions which Plaintiffs assert arise from their reliance on the Earlam's alleged statements include moving the contracted cotton into storage while waiting on instruction from Debtor to begin (or, in the case of Plaintiff BCT as discussed further below, continue) delivery, deciding to forego taking legal action against Debtor immediately following the October 2008 meetings, and attempting to procure financing to pay the farmers who provided Plaintiffs the cotton for it to be ginned prior to its planned delivery to Debtor. Plaintiffs' representatives testified throughout the course of the trial that Earlam and/or Edward Clarke requested during the fall 2008 meetings that Plaintiffs wait to deliver the contracted cotton to Debtor. Plaintiffs' testimony on this subject consistently indicated that Earlam and/or Clarke informed Plaintiffs of Debtor's issues with receiving payment on old crop cotton from various third parties and that, as a result, Debtor needed more time before it could begin accepting the cotton contracted to be sold under the Ginner Contracts. Additionally, Adams, Clarke, and Earlam (all of whom participated in most, if not all, of the fall 2008 meetings with Plaintiffs) testified to the same effect.
In reviewing Plaintiffs' representatives' statements, the evidence before the Court makes it more likely than not that any acts of reliance, include delayed delivery and the decision to forestall pursuit of legal action against Debtor, were based upon requests from Earlam and agents of Debtor (i.e., Clarke) that Plaintiffs give Debtor more time to receive payment on its old crop cotton, not the alleged "stand behind" statements. For example, Linda Exum testified that BCT's election to withhold delivery beyond the rejection of the second shipment was out of reliance on Earlam and Clarke's statements that Debtor needed time to collect payments on its old crop cotton inventory before Debtor could accept delivery from BCT or the other Plaintiffs, not because BCT or its agents were under the impression that delayed delivery would somehow trigger a responsibility owed by Plexus Limited and/or Earlam to "stand behind" the contracts.
The Court in its Summary Judgment Order specifically separated out Plaintiffs' fraud, negligent misrepresentation, and promissory estoppel claims into two groups: those relating to Debtor's future performance and those tied to Earlam, individually and/or on behalf of Plexus Limited, promising to "stand behind" the Ginner Contracts and guarantee their future performance. The former were resolved in favor of Defendants in the Summary Judgment Order and the latter are what remained at trial. As discussed above, Plaintiffs failed to meet their burden by a preponderance of the evidence or otherwise to show reliance on the "stand behind" statements.
Plaintiffs further failed to prove another common element of the representation claims: causation. As noted above, the parties have consistently agreed that Debtor breached the Ginner Contracts in mid-January 2009.
The evidence before the Court shows that it was more likely than not that Debtor would not have accepted Plaintiffs' cotton if they had attempted to deliver it rather than forebear due to its overall weakened financial condition and that such fact was reasonably known by Plaintiffs at all relevant times. In short, Plaintiffs' damages were not caused by their reliance, even if such reliance did in fact exist, with respect to the "stand behind" statements. Witnesses for Plaintiffs and Defendants alike consistently agreed at trial that Earlam and other members of Debtor's board of directors made clear in the October 2008 visits that Debtor was not in a position to accept Plaintiffs' cotton in the fall of 2008. Plaintiffs' concerns as to these statements, not the alleged "stand behind" statements, is reflected in the various emails, letters, and testimony before the Court. Even if Earlam did in fact state that he and/or Plexus Limited "stood behind" Debtor's performance of the Ginner Contracts, it is apparent that Plaintiffs' damages—which are directly connected to Debtor's ultimate breach—arose from Debtor's financial troubles and the absence of necessary credit to purchase the contracted cotton during the timeframe originally provided by the Ginner Contracts. Even with Plaintiffs' temporary forbearance, Debtor's financial circumstances did not improve to the degree that it would be able to perform. This would have occurred regardless of whether Earlam, individually and/or on behalf of Plexus Limited, ever spoke the words "stand behind" in the October 2008 meetings or elsewhere. BB&T called Debtor in default on its credit line covenants for reasons unrelated to Debtor's contracts with Plaintiffs or Earlam's alleged representations to Plaintiffs or any other parties in relation to support that might be provided by him or Plexus Limited. In the absence of a causal link between Plaintiffs' alleged reliance on Earlam's "stand behind" statements and Plaintiffs' damages, Plaintiffs remaining representation claims must fail as a matter of law. Plaintiffs failed to meet their burden of proof.
Based on the foregoing reasons, the Court finds judgment is appropriate in favor of Defendants Earlam and Plexus Limited on all remaining claims in this adversary proceeding.
