New York

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

In re Verestar, Inc.
343 B.R. 444 (Bkrpt.S.D.N.Y. 2006)

United States Bankruptcy Court,

S.D. New York.

In re VERESTAR, INC., et al., Debtors.

Official Committee of Unsecured Creditors of Verestar, Inc., Verestar Networks, Inc. and Verstar International, Inc. for and on behalf of itself and Verstar, Inc., Verestar Networks, Inc. and Verestar International, Inc., Plaintiffs,

v.

American Tower Corporation, Bear, Stearns & Co., Inc., Justin Benincasa, Norman A. Bikales, Alan Box, Arnold Chavkin, Steven B. Dodge, David W. Garrison, William H. Hess, David Kagan, Marc Layne, Jack R. McDonnell, Michael Milsom, Scott Moskowitz, Steven J. Moskowitz, Raymond O'Brien, Matthew Petzold, David J. Porte, Bradley E. Singer, James Taiclet and Joseph L. Wynn, Defendants.

Bankruptcy No. 03-18077(ALG).

Adversary Nos. 05-03635, 05-02259.

June 9, 2006.

*454 Kasowitz, Benson, Torres & Friedman LLP, by David S. Rosner, Esq., Cindy C. Kelly, Esq., Michael J. Bowe, Esq., Brian Condon, Esq., Erin Zavalkoff, Esq., New York, NY, for the Official Committee of Unsecured Creditors.

King & Spalding LLP, by Barry N. Seidel, Esq., Scott E. Eckas, Esq., New York, NY, for American Tower Corporation and the Individual Defendants.

Kramer, Levin, Naftalis & Frankel, LLP, by Barry H. Berke, Esq., Stephen M. Sinaiko, Esq., New York, NY, for the Bear Stearns Defendants.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

These are motions to dismiss filed by the defendants in two separate lawsuits brought by the Official Committee of Unsecured Creditors (the “Committee”) of Verestar, Inc. and affiliates (“Verestar”) in connection with the above-captioned Chapter 11 cases. The Committee has sued the following defendants: American Tower Corporation (“ATC”), Verestar's parent corporation; Bear Stearns & Co., Inc. (“Bear Stearns”), financial advisor to ATC and Verestar; two Bear Stearns' officers, Marc Layne and Scott Moskowitz (together with Bear Stearns, the “Bear Stearns Defendants”); and individuals Justin Benincasa,*455 Norman A. Bikales, Alan Box, Arnold Chavkin, Steven B. Dodge, David W. Garrison, William H. Hess, David Kagan, Michael Milsom, Steven Moskowitz, Raymond O'Brien, Matthew Petzold, David Porte, Bradley E. Singer, James Taiclet and Joseph L. Wynn (the “Individual Defendants”). FN1 Both complaints were filed on July 8, 2005 by the Committee on behalf of Verestar and its co-debtor subsidiaries (together with Verestar, the “Debtors”). One was commenced as an adversary proceeding in this Court by a complaint filed against ATC only (the “Bankruptcy Court Complaint”).FN2 The other was commenced as a plenary action in the United States District Court for the Southern District of New York by a complaint filed against all the Defendants (the “District Court Complaint” and together with the Bankruptcy Court Complaint, the “Complaints”). The District Court Complaint was referred to this Court by Judge Patterson in strongly-worded opinions concluding that the Committee had no reasonable basis for having filed initially in the District Court rather than in this Court. Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Corp., 2005 WL 3455775, 2005 U.S. Dist. LEXIS 33340 (S.D.N.Y. Dec. 15, 2005), 2006 WL 763054, 2006 U.S. Dist. LEXIS 12820 (S.D.N.Y. Mar. 23, 2006).

FN1. Norman A. Bikales, Alan Box, David W. Garrison, Jack R. McDonnell, Steven Moskowitz, Scott Moskowitz, Joseph L. Wynn, David J. Porte, Steven B. Dodge, William H. Hess, Raymond O'Brien, and Bradley E. Singer are former directors of Verestar. Justin Benincasa, David Kagan, Michael Milsom and Matthew Petzold are former non-director officers of Verestar. Arnold Chavkin (a former director of ATC) and James Taiclet (ATC's president and CEO) never served as officers or directors of Verestar.

FN2. The Complaint was endorsed, “Jury Trial Demand.”

The factual allegations set forth in the Complaints are virtually identical and serve as the basis for a total of twenty-one claims for relief. ATC has moved to dismiss the following claims raised in the Bankruptcy Complaint: (i) equitable subordination (B. Ct. Count III) and (ii) substantive consolidation (B. Ct. Count IV).FN3 The Defendants have moved to dismiss variously the following claims raised in the District Court Complaint: (i) alter ego (D. Ct. Count I), (ii) breach of fiduciary duty (D. Ct. Count II), (iii) conversion (D. Ct. Count III), (iv) aiding and abetting breach of fiduciary duty and conversion (D. Ct. Count IV), (v) conspiracy (D. Ct. Count V), (vi) tortious interference with prospective or existing business relations (D. Ct. Count VII), (vii) deepening insolvency (D. Ct. Count VIII), (viii) breach of contract (D. Ct. Count IX), (ix) state law fraudulent transfer (D. Ct. Counts X and XI), (x) Bankruptcy Code fraudulent transfer (in part) (D. Ct. Counts XII and XIII), (xi) recovery of avoidable transfers (in part) (D. Ct. Count XV), (xii) turnover (in part) (D. Ct. Count XVI), and (xiii) accounting pursuant to Bankruptcy Code § 542(e) (D. Ct. Count XVII).FN4

FN3. The following claims raised in the Bankruptcy Court Complaint are not subject to the motions to dismiss: (i) objection to ATC claims (B. Ct. Count I) and (ii) recharacterization of debt allegedly owed by Verestar to ATC as equity (B. Ct. Count II).

FN4. The following claims raised in the District Court Complaint are not subject to the motions to dismiss: (i) Bankruptcy Code fraudulent transfer (in part) (D. Ct. Counts XII and XIII), (ii) avoidance of preferential transfers (D. Ct. Count XIV), (iii) recovery of avoidable transfers (in part) (D. Ct. Count XV), and (iv) turnover (in part) (D. Ct. Count XVI).

The motions are disposed of as follows.

Background

The Facts as Alleged in the Complaints

The following factual allegations in the Complaints are assumed to be true for purposes of these motions to dismiss.

*456 Verestar was founded in 1999 as a wholly owned subsidiary of ATC, a telecommunications company, for the purpose of owning and operating ATC's teleport business. ATC initially capitalized Verestar with $1,000, an amount that the Committee asserts was inadequate given the size and nature of the teleport business. Verestar allegedly remained undercapitalized and dependent on ATC for financing throughout its existence. The Committee asserts that at all relevant times ATC treated Verestar as a mere division and used Verestar to reap financial rewards from the teleport business while attempting to shield itself from any associated liability or risk. (D.Ct.Compl.¶¶ 33-34.)

ATC was Verestar's 100% shareholder, and according to the Complaint, there was an almost complete overlap of its officers and directors with those of Verestar, allowing ATC to dominate and control Verestar's Board and all material business decisions, including its teleport acquisitions and other transactions. (D.Ct.Compl.¶¶ 35, 37.) As evidence of control, the Committee asserts that (i) the majority of Verestar's Board meetings were held on the same day as ATC's board meetings at ATC's regional offices or headquarters in Massachusetts, and not at Verestar's headquarters in Virginia (D.Ct.Compl.¶ 35); (ii) ATC's officers and directors attended and directed Verestar Board meetings and engaged in transactions on Verestar's behalf, even though they did not hold positions at Verestar (D.Ct.Compl.¶ 36); and (iii) by the end of 2001, Verestar did not have a properly constituted board, due to the resignation of several board members and the failure to fill vacancies as required by Verestar's by-laws. (D.Ct.Compl.¶ 52.)

ATC and its directors and officers also allegedly held out to creditors and the public in general that Verestar was part of a single operation with ATC, describing Verestar as a division of ATC. (D.Ct.Compl.¶ 37.) As further evidence of ATC's dominion over Verestar, the Committee asserts that ATC maintained Verestar's records and controlled all of its core corporate functions. ATC provided Verestar's corporate support services, including human resources, accounts payable, accounts receivable, tax, internet and information technology functions. Verestar employees were paid by ATC with checks drawn on ATC accounts, and ATC provided employee benefits and all forms of business insurance. (D.Ct.Compl.¶ 39.)

With respect to financing, the Committee alleges that Verestar's main bank account was in the name of ATC, and ATC officers were authorized signatories on all other ancillary Verestar accounts. ATC used its control over Verestar to sweep funds from Verestar's accounts on a daily basis and then co-mingled these funds with those from its own operations without returning adequate consideration to Verestar. (D.Ct.Compl.¶ 40.)

According to the Complaint, ATC also caused Verestar to engage in an extremely aggressive acquisition strategy, secure in the belief that in the event the teleport business failed, it could extract the value of the business at the expense of Verestar's other creditors. (D.Ct.Compl.¶¶ 37, 43.) Between 1997 (before Verestar's separate incorporation) and 2003, ATC allegedly pursued over thirteen acquisitions and other transactions on Verestar's behalf without regard to Verestar's purported separate legal existence and with the result that its business was grossly over-expanded. (D.Ct.Compl.¶ 44.) These transactions included, inter alia, (i) the acquisition of InterPacket Networks, Inc. (“IPN”) in December 2000, which was not approved by the Verestar Board and was consummated despite ATC's knowledge that the acquisition would generate substantial *457 losses for Verestar (D.Ct.Compl.¶¶ 45-46); (ii) the purchase of additional satellite capacity from PanAmSat International Systems, Inc. (“PanAmSat”) in March 2001, despite the knowledge of ATC, the Bear Stearns Defendants and certain of the Individual Defendants that Verestar would continue to incur losses and not be able to meet its financial commitments (D.Ct.Compl.¶¶ 47-48); and (iii) the acquisition of Integrated Systems Design, Inc. (“ISD”) in October 2001, which allegedly was neither considered nor approved by the Verestar Board (D.Ct.Compl.¶¶ 51.) Each of these transactions contributed to Verestar's increased operating costs and major revenue and EBITDA losses (D.Ct.Compl.¶¶ 47, 49-50.)

The Committee alleges that in the spring of 2002, when it was clear that Verestar would ultimately have to be liquidated, ATC's and Verestar's officers and directors (mostly the same individuals) and Bear Stearns agreed on a scheme entitled “Project Harvest,” a program to transfer as many of Verestar's assets and as much of its value as possible to ATC before Verestar's inevitable collapse. Bear Stearns, which was retained by Verestar as the financial advisor for Project Harvest at the same time it was serving as financial advisor to ATC, allegedly played a leading role in the scheme through its managing director, Scott Moskowitz, and one of its vice presidents, Marc Layne. (D.Ct.Compl.¶¶ 55-56.) Under Project Harvest, ATC allegedly cut off new funding to Verestar and began to siphon off its value. ATC also allegedly caused Verestar to sell certain assets to ATC for little or no consideration and to convey other assets to third parties and divert the proceeds to ATC. (D.Ct.Compl.¶¶ 57-58, 60.) The District Court Complaint identifies the following transactions as steps taken to carry out Project Harvest:

Transfer of Tower Assets: In 2002 and 2003, ATC, Dodge, Singer, Porte and Hess caused Verestar to transfer its communication tower assets and surrounding land (the “Tower Assets”) to ATC. The Committee specifically alleges that ATC, Dodge, Singer and Porte caused Verestar to transfer the Tower Assets in San Bruno to ATC without appraisal and for substantially less than fair market value. The Committee also alleges that Dodge instructed Bear Stearns through Layne, as well as Steven Moskowitz, Taiclet, Singer, Hess and Milsom, to review Verestar's Tower Assets and determine how to transfer them to ATC. (D.Ct.Compl. ¶ 59.)

Sale of MTN: ATC allegedly looted Verestar's subsidiary, Micronet, Inc. (“MTN”), the only profitable operating asset in Verestar's portfolio. First, ATC helped its lenders perfect their security interests in MTN so that the value of the asset would be transferred to the lenders in the event it was not sold before Verestar's bankruptcy filing. This would prefer ATC because it was also liable on the debt. Second, ATC caused Verestar to engage Bear Stearns to achieve a disposition of MTN beneficial to ATC. To facilitate this process, Dodge, Singer, Porte and Hess falsely represented to Verestar personnel that Verestar would receive consideration from any sale of MTN. Falconhead Capital, a private equity firm, offered to purchase MTN for $30 million in 2002, at which time Kagan was serving as Falconhead Capital's president and CEO. ATC, through Dodge, Singer, Bikales, Hess and Milsom, directed Bear Stearns to accept the offer, negotiated and approved the final sale, and kept all the proceeds. Dodge, Singer, Hess and O'Brien approved the transfer on behalf of Verestar despite having knowledge that Verestar would receive nothing in return. (D.Ct.Compl.¶¶ 61-64.)

*458 Sale of GenTel: Bear Stearns was also instructed to sell another valuable Verestar subsidiary and teleport asset, the General Telecom (“GenTel”) voice port business. ATC, Bear Stearns, Layne, Dodge, Singer, Hess, O'Brien and Petzold allegedly selected an offer that was less valuable to Verestar and better suited to ATC's desire to maximize value transferred to ATC prior to a Verestar bankruptcy. Again, ATC received all of the sale proceeds, and Dodge, Singer, Hess and O'Brien, in violation of their duties, approved the transaction on behalf of Verestar after the fact. (D.Ct.Compl.¶ 65.)

The Credit Facility Seventh Amendment: In October 2002, with Verestar's consent, ATC executed an amendment (the “Seventh Amendment”) to its credit facility that (i) removed Verestar as a borrower, kept Verestar as a guarantor and left its assets pledged to ATC's lenders; (ii) terminated Verestar's rights to a portion of proceeds of the sale of any Verestar asset pledged as collateral; (iii) capped additional ATC funding for Verestar at $25 million; and (iv) eliminated certain defenses Verestar and its creditors could assert against claims by ATC's lenders in bankruptcy. The alleged dual purpose of the amendment was to avoid the trigger of a default when Verestar filed for bankruptcy and to siphon off the value of Verestar's teleport assets that could not be transferred to ATC in kind. By unanimous consent, the Verestar Board authorized Petzold to execute the Seventh Amendment on behalf of Verestar (D.Ct.Compl.¶¶ 66-70.)

Vendor Payments: ATC allegedly caused Verestar to withhold substantial payments to vendors in order to increase immediate cash available for “harvesting” to ATC. ATC also allegedly caused Verestar to make misrepresentations to these vendors concerning Verestar's financial situation in order to obtain further concessions that would benefit ATC. Dodge, Milsom, Singer, Hess, O'Brien, Petzold and Bear Stearns were allegedly involved in the preparation and communication of these misrepresentations. (D.Ct.Compl.¶ 71.)

The $250 Million Note: The District Court Complaint alleges that ATC officers and directors knew that ATC would be unable to recover the funds that it had previously invested in Verestar's teleport business by way of equity or undocumented inter-company advances. Therefore, in 2002, these parties created a $250 million promissory note payable by Verestar to ATC that was back-dated to January 1, 2000 (the “Note”), plus Verestar Board resolutions purporting to consent to the debt and acknowledging loans in an almost equal amount. Specifically, Hess prepared draft resolutions and Dodge, Singer and Porte executed written consents to the resolutions. The District Court Complaint asserts that prior to the back-dated Note, there was no debt as such, Verestar and ATC did not record any of its advances to Verestar as loans, Verestar never paid interest to ATC on any purported loans, and ATC never imposed on Verestar any repayment terms, fixed any maturity dates, or required any collateral from Verestar. Further, the Committee alleges that (i) ATC had the Note fraudulently executed by Kagan, who was an officer and director of MTN, a subsidiary of Verestar that was later sold, (ii) Verestar Board approval of the Note was not valid, and (iii) the debt was incurred without consideration. (D.Ct.Compl.¶¶ 72-75.)

The Bankruptcy

On December 22, 2003, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The Committee was appointed on January 2, 2004. On July 12, 2004, this Court approved a *459 stipulation, as amended on November 7, 2005, granting the Committee standing to pursue claims on behalf of the Debtors against the Defendants. The Debtors sold all of their remaining assets in the Chapter 11 cases.FN5

FN5. It is uncertain, as of the date of this opinion, whether the proceeds of the sales will be sufficient to cover even the Debtors' administrative expenses.

ATC has filed proofs of claim in the cases that, in total amount, dwarf all other claims, but it has (not surprisingly) been unwilling to agree to a plan of reorganization that is premised on lawsuits that would disallow its claims and render it liable to pay all other debt. The Chapter 11 cases have, accordingly, stalled, and the resolution of these adversary proceedings remains the most sig

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