The opinion of the court was delivered by: Ambrose, Chief District Judge
MDL Docket no. 2021 WDPA Docket no. 2:09-mc-00162
OPINION AND ORDER OF THE COURT KRONES DEFENDANTS'MOTION TO DISMISS
Pending before the court is a Motion to Dismiss filed by Defendants, Krones AG, Krones Inc., Heinz Sommer, and Dr. Volker Kronseder (hereinafter, collectively referred to as "Krones"), seeking to dismiss all claims asserted against them (counts Three, Four, Seven, Eight, Nine and Twelve) in Plaintiff's Complaint.*fn1 (Docket No. 85 at 8-cv-1518 and Docket No. 62 at 9-mc-162).*fn2
Plaintiff, Marc S. Kirschner ("Kirschner"), in his capacity as Liquidation Trustee of the Le-Nature's Liquidation Trust, filed a Memorandum of Law in Opposition thereto. (Docket No. 106) and Krones filed a Reply Memorandum in Support of the Motion to Dismiss (Docket No. 115-2). After careful consideration of the same, said Motion (Docket No. 85) is denied as more fully set forth below.
Defendants filed their motion to dismiss pursuant to Fed.R.Civ.P. 9(b), 12(b)(1) and 12(b)(6).*fn3 When deciding whether to grant or deny a 12(b)(6) motion the Supreme Court has held:
While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).
Bell Atlantic Co. v. Twombly, 550 U.S. 544, 555 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). (Citations, quotes and footnote omitted). See also, Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (a plaintiff's factual allegations must be enough to raise a right to relief above the speculative level).
Most recently, in Ashcroft v. Iqbal, ___ U.S.___, 129 S.Ct. 1937 (2009), the Supreme Court held, ". . . a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at1949. (Citations and quotes omitted).
In Iqbal, the Court specifically highlighted the two principles which formed the basis of the Twombly decision: First, for the purposes of a motion to dismiss, courts must accept as true all factual allegations set forth in the complaint, but courts are not bound to accept as true any legal conclusions couched as factual allegations. Id. at 1949-1950. See also, Fowler v. UPMC Shadyside, ___ F.3d ___ (3d Cir. 2009), 2009 WL 2501662. Second, a complaint will only survive a motion to dismiss if it states a plausible claim for relief, which requires a court to engage in a context-specific task, drawing on the court's judicial experience and common sense. Iqbal at 1950. Where well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged -- but has not shown -- the complainant is entitled to relief. Id., citing, F.R.Civ.P. 8(a)(2).
With the above law in mind and solely for the purposes of ruling on this motion, I assume the following facts are true:
Plaintiff is a trustee appointed by the bankruptcy court. The debtor is Le-Nature's Inc. ("LeNature's" or "the corporation"). Le-Nature's was a beverage manufacturer, bottler and distributor based in Latrobe, Pennsylvania. Gregory Podlucky ("Podlucky") was the chief executive officer of Le-Nature's, its majority shareholder, and the chairman of its board. Complaint, ¶¶ 1-34.
Podlucky's brother, Jonathan Podlucky, served as the chief operating officer, David Getzik served as the chief financial officer, Robert Lynn was the executive vice president, and Andrew Murin was an adviser to Podlucky. Podlucky's brother, Getzik, Lynn and Murin were all members of Le-Nature's board of directors and all were nominated to the board by Podlucky. Complaint, ¶¶ 35-37. At times, these individuals are collectively referred to as "the Insiders."
Le-Nature's produced its first beverage product in 1992, and by 2005, claimed to be producing nearly 60 different products. The growth in the alleged variety of products it sold purportedly spurred growth in its gross sales, net sales and profits. However, Plaintiff has asserted that between 2002 and 2005, due to a fraudulent scheme advanced by Podlucky along with the Insiders, Le-Nature's reported sales were grossly disproportionate to its actual sales. Complaint, ¶¶ 42, 44-45.
These inflated sales figures enabled Le-Nature's to raise capital with the assistance of the Defendants, in particular, Wachovia Capital Markets, LLC d/b/a Wachovia Securities, Wachovia Bank, National Association (hereinafter referred to collectively as "Wachovia"), Krones, CIT Group/Equipment Financing, Inc. (hereinafter "CIT"), Marshall Financial, Inc., and Marshall Investments Corporation (hereinafter "Marshall"). Together with Podlucky and the Insiders, these parties engaged in a form of a "Ponzi"scheme -- constantly raising money and incurring ever-increasing debts to refinance investors while cultivating the illusion of a legitimate profit-making business. ¶¶ 1-2.
Specifically, Kirschner alleges that Krones inflated prices on equipment for new Le-Nature's bottling line equipment and assisted Podlucky and the Insiders in securing financing based on these inflated prices. Kirschner asserts that CIT and Marshall knew the equipment prices were inflated but still arranged for "synthetic lease" equipment lease financing based on the bogus prices. Krones, CIT and Marshall reaped significant fees by using these inflated figures while Podlucky and the Insiders received the excess revenue from the inflated pricing. ¶¶ 11, 13, 16-18, 134-142.
In addition to the actions of Krones, CIT and Marshall, from April of 2003 through December of 2005, Wachovia arranged a series of credit facilities for Le-Nature's. In an effort to secure lenders for each facility, Wachovia assisted Le-Nature's in the preparation and distribution of a "Confidential Information Memorandum," but these memoranda materially misrepresented (among other things) Le-Nature's sales and profits. These credit facilities were supposed to generate funds for the expansion of Le-Nature's production lines. Although Le-Nature's did expand its production lines by expanding the capacity of its Latrobe, Pennsylvania plant in 2003 and by building a new bottling plaint in Phoenix, Arizona in 2005, Plaintiff asserts these expansions were unnecessary given the false sales figures and further believes the credit facilities were undertaken to finance and prop up Le-Nature's slumping operations. Complaint, ¶¶ 42-46, 60, 62, 72, 76, 81, 96.
In May of 2006, the minority preferred shareholders (who were represented by three independent directors on the Le-Nature's board), initiated an action in the Delaware Chancery Court against the corporation, Podlucky, his brother, Murin and Lynn.*fn4 In June of 2006, the Chancery Court entered a preliminary injunction restraining Le-Nature's company from taking certain steps, such as making capital expenditures in an amount in excess of $1,000, without minority shareholder approval. Complaint, ¶ 48.
In October of 2006, LeNature's preferred minority shareholders were told that Podlucky had converted funds deposited by one of the corporation's equipment lessors, AIG. This information was passed to the shareholders upon AIG's discovery that Krones had transferred nearly $20 million of AIG's deposit to Le-Nature's based on a forged AIG letter "authorizing" the transfer of funds. On October 20, 2006, following the revelation of the forgery, the Delaware Chancery Court issued a temporary restraining order and on October 27, 2006, the Court approved the preferred minority shareholders' request for the appointment of a custodian for Le-Nature's, and named Kroll Zolfo Cooper, LLC ("KZC") as custodian.*fn5 On November 1, 2006, the managing director of KCZ filed an affidavit with the Chancery Court detailing financial discrepancies at Le-Nature's. Also on November 1, 2006, several of Le-Nature's creditors initiated involuntary bankruptcy proceedings. Complaint, ¶¶ 49-53.
Since the initiation of the bankruptcy proceedings, the investigation led by Kirschner has uncovered two separate accounting systems at Le-Nature's: one system ("Navision") tracked actual sales, accounts payable, inventory, etc. while the other system ("Real World") contained primarily fraudulent numbers to which only Podlucky and one Le-Nature's employee (Ms. Andreycak) had access. In addition, a secret room was discovered at the Latrobe bottling facility which held safes that contained jewelry purchased by Podlucky. Podlucky also purchased over 8,000 Lionel model trains and was building a mansion for his personal residence. Kirschner avers that the jewelry, trains and residence were all paid for with monies Podlucky embezzled from Le-Nature's through the "scheme." Complaint, ¶ 54.
1. The Krones Defendants' In Pari Delicto Argument
Krones primarily argues that the equitable doctrine of in pari delicto bars Kirschner from asserting any claims against the Krones Defendants. In pari delicto, which literally means "in equal fault," is rooted in the common-law notion that a plaintiff's recovery may be barred by his own wrongful conduct. Pinter v. Dahl, 486 U.S. 622, 632, 108 S.Ct. 2063, 2070 (1988). See also, Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 2626-2627, 86 L.Ed.2d 215 (1985)(common-law defense derives from the Latin, in pari delicto potior est conditio defendentis: In a case of equal or mutual fault the position of the defending party is the better one.) The defense is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality. Bateman Eichler, 472 U.S. at 306.*fn6
However, in pari delicto:
. . .is a murky area of law. It is an ill-defined group of doctrines that prevents courts from becoming involved in disputes in which the adverse parties are equally at fault. Courts in Pennsylvania have not been of one mind as to whether the doctrine is legal or equitable. Compare Sacco v. Twp. of Butler, 863 A.2d 611, 615 n. 3 (Pa.Commw.Ct.2004) (referring to doctrine as "equitable") with Feld & Sons, Inc. v. Pechner, Dorfman, Wolfee, Rounick & Cabot, 458 A.2d 545, 548 (Pa.Super.Ct.1983) (referring to the "common-law" doctrine of in pari delicto ).
Official Committee of Unsecured Creditors of Allegheny Health, Educ. and Research Foundation v. PricewaterhouseCoopers, LLP, No. 07-1397, 2008 WL 3895559, *5 (3d Cir. July 1, 2008) (footnote omitted).
Krones posits that its alleged culpability along with Le-Nature's arose out of the same illegal or wrongful acts and as such, Krones suggests that Le-Nature's would be barred by the doctrine of in pari delicto from bringing this lawsuit against Krones. Krones concludes that because Kirschner "stands in the shoes" of Le-Nature's, he too is barred from recovery under the doctrine of in pari delicto. Krones primarily relies on Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340 (3d Cir. 2001), ("Lafferty"), for this argument.
In Lafferty, two debtor corporations filed for bankruptcy after a "Ponzi scheme" collapsed leaving the investors in these corporations with substantial losses. The scheme was orchestrated by the corporate debtors' sole shareholder, William Shapiro, who issued fraudulent debt certificates on behalf of the corporations. When the corporations had no prospect of repaying the debt, the corporations sought protection through bankruptcy. Subsequent to the bankruptcy filings, the debtors' estates, through their creditors' committees, brought claims alleging that third parties had fraudulently induced the debtor corporations to issue debt securities thereby deepening their insolvency and forcing them into bankruptcy.
One of the main issues in the Lafferty case was whether the in pari delicto doctrine would bar the claims brought by the creditor's committee on behalf of the debtors' estates. The Court of Appeals for the Third Circuit held that in pari delicto could bar the claims if Shapiro's conduct could be imputed to the corporations and hence to the creditors' committees since the committees stood in the shoes of the debtor-corporations.
The Lafferty Court broke its analysis into two parts. First, it determined that 18 U.S.C. § 541 specifically precluded courts from taking into account events which occur after the commencement of a bankruptcy case. Since the creditors' committees were appointed after the filing of the bankruptcy case, the Court evaluated the in pari delicto defense without regard to the fact that the committees were "innocent successors". Relying in case law from the Tenth, Sixth and Seventh Circuits, the Lafferty court held that a creditors' committee (or a bankruptcy trustee), who stands in the shoes of the debtor, could be barred by doctrine of in pari delicto even when the committee holds the status of an innocent successor.
Having reached a conclusion on the first part of its analysis, the Lafferty Court next questioned whether Mr. Shapiro's acts and conduct could be imputed to the corporations. The Court held that fraud of an officer could be imputed to a corporation when the officer commits fraud: (1) in the course of his employment, and (2) for the benefit of the corporation. After determining that Mr. Shapiro had committed fraud in the course of his employment, the Court analyzed whether his fraudulent conduct was perpetrated for the benefit of the corporations. Although the Court noted that it would ordinarily apply the adverse interest exception*fn7 to ascertain whether fraudulent conduct could be imputed, under the facts of the Lafferty case, Mr. Shapiro's status as a sole shareholder led the court to apply to the "sole-actor" exception. The Court held:
The general principle of the "sole actor" exception provides that, if an agent is the sole representative of a principal, then that agent's fraudulent conduct is imputable to the principal regardless of whether the agent's conduct was adverse to the principal's interests. [Cite omitted.] The rationale for this rule is that the sole agent has no one to whom he can impart his knowledge, or from whom he can conceal it, and that the corporation must bear the responsibility for allowing an agent to act without accountability. [Cites omitted.] 267 F.3d at 359. As a result of this analysis, the majority of the Lafftery Court concluded: (1) Shapiro's conduct could be imputed to the corporations, and (2) the doctrine of in pari delicto barred the creditors' committees, which stepped directly into the shoes of the corporate debtors (post the filing of the bankruptcy petition), from bringing their claims.
Kirschner distinguishes Lafferty from the instant matter on the following grounds: First, Kirschner assumed control of Le-Nature's indirectly, vis-a-vis from a court-appointed custodian (KCZ) who ran the company for a brief period of time before the bankruptcy petition was filed; and second, since the alleged fraud was only perpetrated by some of the debtor's shareholders, imputation of that fraud to the corporate debtor cannot occur. In the alternative, Kirschner argues that even if the debtor's conduct could be imputed to a trustee, the fraud was not perpetrated to benefit the debtor and thus falls outside the adverse interest exception. After a review of the facts of this case, in the light most favorable to the non-moving party and as more fully explained below, I agree with Kirschner that the appointment of KCZ precludes the application of the doctrine of in pari delicto in this case.
Like the Lafferty Court, I begin my analysis with section 541 of the bankruptcy code. The legislative history to section ...