Antioch Co. Litigation Trust v. Morgan, et al.

Summarized by Dean Langdon , DelCotto Law Group PLLC
10 years 2 months ago

Citation:

File Name 15a0778n.06; Docket No. 14-3790

Tag(s):

Ruling:

The Sixth Circuit Court of Appeals affirmed in part and reserved in part pending certification of a question to the Ohio Supreme Court. The Court of Appeals affirmed dismissal of claims alleging breach of fiduciary duty dismissed below after expert testimony was excluded, resulting in a failure of proof on damages. The Court of Appeals also affirmed dismissal of a claim for equitable subordination because creditor interests as beneficiaries of a litigation trust were not "allowed claims" or "allowed interests" within the scope of 11 U.S.C. Sec. 510, which permits equitable subordination. Finally, the Court of Appeals reserved on a claim for breach of fiduciary duty, pending an answer to the question of whether Ohio law recognized adverse domination as grounds for tolling the statute of limitations for such a claim.

Procedural context:

Litigation Trust brought action in bankruptcy court against certain officers, directors and related trusts for breach of fiduciary duties and equitable subordination. After adopting bankruptcy court report and recommendation, district court withdrew the reference and granted motions for partial summary judgment, which were appealed once they became final.

Facts:

Morgan and Moran (Morgan's daughter) served as officers and directors of the Antioch Company, which engaged in direct marketing of scrapbooking materials through independent sale consultants. In 2003, the company ESOP owned about 43% of the company, with the balance being owned by other officers and directors of the company (or their trusts), including Morgan and Moran. In December, 2003 the board approved a leveraged buy-out of the non-EOP shareholders at a price of $850 per share, allocated between cash, subordinated notes and warrants. One of the claims brought by the Litigation Trust was that approval of this sale was a breach of the directors fiduciary duty, being too highly leveraged. The district court dismissed this claim as time-barred under Ohio's statute of limitations for breach of fiduciary duty claims. The Court of Appeals reserved on this issue, and certified a question to the Ohio Supreme Court: whether the doctrine of adverse domination could be applied to toll the statute of limitations for a breach of fiduciary duty claim against an officer or director of an Ohio corporation. By 2007, the company's fortunes declined and the board engaged financial advisors to seek a sale or recapitalization. The company received a letter of intent for $54 million in May, 2008, however, the board never approved it, allegedly because Morgan and Moran ousted board members and scuttled the deal. The district court dismissed this claim after excluding testimony of the Litigation Trust's expert witness, which in turn led to a failure to present proof of damages. The basis for excluding the expert testimony was the failure of the expert witness to explain how his experience enabled him to form an opinion on the value of the company at the time the 2008 letter of intent was received. The Court of Appeals affirmed. Finally, Morgan, Moran and their trusts ended up owning over 70% of the claims of the Litigation Trust beneficiaries based on their subordinated notes from the ESOP transaction and releases they provided. The Litigation Trust sought to equitably subordinate their claims under 11 U.S.C. Sec. 510. The district court dismissed this claim on the grounds that the claims were discharged under the company's confirmed plan. The Court of Appeals affirmed on the grounds that the interests in the Litigation Trust were not "allowed claims" or "allowed interests" which fell within the scope of 11 U.S.C. Sec. 501 and 510.

Judge(s):

Guy, Moore and Kethledge, opinion by Guy

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