IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) Chapter 11 ) MERVYN’S HOLDINGS, LLC, et al. ) Case No. 08-11586 (KG) ) Debtors. ) ) MERVYN’S LLC, ) ) Plaintiff, ) ) v. ) Adv. Proc. No. 08-51402 (KG) ) LUBERT-ADLER GROUP IV, LLC, et al., ) ) Defendants. ) Re Dkt No. 43 MEMORANDUM OPINION1 INTRODUCTION The matter before the Court is Defendant Target Corporation’s Motion to Dismiss (the “Motion”) the adversary proceeding brought against it by Mervyn’s LLC (“Debtor”) acting through the Official Committee of Unsecured Creditors (the “Committee”).2 1 This Opinion constitutes the findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. To the extent any of the following findings of fact are determined to be conclusions of law, they are adopted, and shall be construed and deemed, conclusions of law. To the extent any of the following conclusions of law are determined to be findings of fact, they are adopted, and shall be construed and deemed, as findings of fact. 2 The Committee has brought this adversary proceeding on behalf of the Debtor pursuant to an Order which the Court entered on December 30, 2008 (D.I. 1330), granting it standing. STATEMENT OF FACTS3 I. Background Debtor, a California limited liability company, was a nationwide retailer of affordable fashion and home décor products which at one time operated 177 retail stores in the Midwest, South and Pacific Northwest. (Am. Compl. ¶ 42). In 1978, the Dayton Hudson Corporation (“DHC”) acquired Mervyn’s which became a wholly-owned subsidiary of DHC. DHC also owned several “higher end” department stores, including Target Stores which became such a successful chain of discount retail stores that DHC changed its corporate name to “Target Corporation” (“Target”). By 2003, Target owned and operated three department store chains: Marshall Field’s, Mervyn’s and Target Stores. Target’s board of directors had decided to focus solely upon the Target chain and therefore decided to sell both Marshall Field’s and Mervyn’s. II. Private Equity Sale After a competitive auction process, Target entered into an Equity Purchase Agreement (the “Agreement”) on July 29, 2004, with a group of private equity firms that formed one of the Debtor entities “Mervyn’s Holdings LLC,” (“Mervyn’s Holdings”). 3 The operative complaint is the First Amended Complaint which the Committee filed on December 22, 2008 (Adv. Dkt. 7). The Court denied leave to the Committee to file a Second Amended Complaint (Adv. Dkt. 178 and 179), which does not impact the Motion. The well-pleaded facts are deemed true for purposes of the Motion. See Standard of Review, infra. 2 Mervyn’s Holdings is a Delaware limited liability company that was formed by three private equity groups (collectively, “PE Sponsors.”) In order to spin-off Debtor’s valuable real estate assets from Debtor, the PE Sponsors formed defendant “MDS Companies,” bankruptcy remote entities. (Am. Compl. ¶¶ 62-63). The Agreement itself called for Target to convey 100% of its ownership interest in Debtor to Mervyn’s Holdings for $1.175 billion. (Agreement, ¶ 1). Mervyn’s Holdings represented to Target that it had equity and debt commitment letters from external funding sources indicating that it had arranged loans and letters of credit from outside sources. Id., ¶ 6(d). The Agreement did not require the sale of Debtor’s real estate either by Target or anyone else. Id., ¶ 5(b). Instead, the Agreement expressly prohibited Target from selling or transferring any of Debtor’s real estate and also required Target to convert Debtor from a corporation to a limited liability company (“LLC”). Id. III. The Sale Transaction On September 2, 2004 the sale closed (the “2004 Sale”). Am Compl. ¶¶ 56-57. The parties satisfied or waived the Agreement’s conditions. Mervyn’s Holdings and PE Sponsors borrowed using Debtor’s real estate as collateral and incurred substantial obligations in order to fund the 2004 Sale. (Am. Compl. ¶ 46). Debtor received no residual interest in its own real estate and “all or substantially all of the loan proceeds were paid over 3 to Target.” (Am. Compl. ¶¶ 46, 59).4 Mervyn’s Holdings also leased the real estate back to Debtor at a “substantially increased rate to both service the acquisition debt and to continue to extract over time the significant excess value of the real estate assets over the debt piled onto those assets.” (Am. Compl.¶ 49). Debtor claims that Mervyn’s Holdings’ actions destroyed the Debtor’s value and led to filing of the Chapter 11 petition with the Court on July 29, 2008. CAUSES OF ACTION On September 2, 2008, Mervyn’s brought this adversary proceeding against Target and 38 other defendants by filing a complaint alleging that Target and the other defendants 4 According to Mervyn’s Amended Complaint, the 2004 Sale was funded by three sources: 1. Pursuant to that certain Loan Agreement dated September 2, 2004, Greenwich and Archon, as lenders (the “Senior Real Estate Secured Lenders”), advanced $675,000,000 to Realty I, Realty II, Texas Realty I and Texas Realty II. Repayment of these loans was secured by the Unitary Leases held by the listed borrowers, mortgages, liens, assignments of rents and deeds of trust with respect to the real estate assets that had been transferred to the borrowers by Debtor. Mervyn’s Holdings used all or substantially all of the loan proceeds to pay the purchase price of the 2004 Sale. 2. Pursuant to the Mezzazine Loan Agreement dated September 2, 2004, Greenwich and GS Mortgage (the “Mezzanine Real Estate Secured Lenders”), advanced $125,000,000 to Holdings I, Holdings II, Texas Properties I and Texas Properties II. Repayment of these loans was secured by certain pledges and security interests provided by such borrowers. Mervyn’s Holdings used all or substantially all of the loan proceeds to pay the purchase price. 3. Pursuant to the Securities Purchase Agreement, dated September 2, 2004, Mervyn’s Holdings purchased 100% of the interests in Holdings I and Holdings II for $429,746,414,84. At the closing, Mervyn’s Holdings used these funds to pay the purchase price. (Am. Compl. ¶ 58). 4 engaged in a fraudulent transaction and that Target, among others, breached their fiduciary duty to Debtor and its creditors. Thereafter, Debtor filed its Amended Complaint on December 22, 2008, containing the following claims against Target: Count I: Mervyn’s Holdings caused Debtor’s real estate assets to be transferred with the actual intent to hinder, delay, or defraud creditors or without adequate consideration, in violation of the applicable provisions of the Uniform Fraudulent Transfer Act (UFTA) or Uniform Fraudulent Conveyance Act (UFCA), and Bankruptcy Code Sections 544(b) and 550. Target is liable as a transferee of the proceeds. Count II: Mervyn’s Holdings caused Debtor’s to pledge its real estate assets with the actual intent to hinder, delay, or defraud creditors or without adequate consideration, in violation of the applicable provisions of the UFTA or the UFCA, and Sections 544 (b) and 550. Target is liable as a transferee of the proceeds. Count V: That the owners of Debtor (which changed over time), including Target, each breached the fiduciary duties that they owed to Debtor and its creditors at the respective times that they owned it. Target responded to the Amended Complaint by filing the Motion on April 3, 2009. On May 20, 2009, the adversary proceeding was stayed pending the resolution of a motion to disqualify Kirkland & Ellis LLP, as counsel to Sun Capital Defendants, which the Court denied. (Adv. Dkt. 125). Target now seeks an order from this Court dismissing the claims against it in the Amended Complaint, with prejudice, pursuant to Rules 8, 9 (b), and 12 (b)(6) of the Federal Rules of Civil Procedure, made applicable by Rules 7008, 7009, and 7012 of the Federal 5 Rules of Bankruptcy Procedure. STANDARD OF REVIEW Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable here by Federal Rule of Bankruptcy Procedure 7012(b), governs a motion to dismiss for failure to state a claim upon which relief can be granted. “The purpose of a motion to dismiss is to test the sufficiency of a complaint, not to resolve disputed facts or decide the merits of the case.” Paul v. Intel Corp. (In re Intel Corp. Microprocessor Antitrust Litig.), 496 F. Supp. 2d 404, 407 (D. Del. 2007) (citing Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993)). The complaint “must contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.” Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1969 (2007) (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)) (emphasis in original). In considering a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court must accept as true all factual allegations in the complaint and draw all inferences from the facts alleged in the light most favorable to the plaintiff. Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651, 653 (3d Cir. 2003). The court may not consider matters outside of the pleadings unless the court is willing to treat the matter as a motion for summary judgment. Fed. R. Civ. P. Rule 12(d). A complaint need not contain detailed factual allegations, but “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. 6 . . . Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 127 S. Ct. at 1964-65 (internal citations omitted). The relevant record under consideration consists of the complaint and any “document integral or explicitly relied upon in the complaint.” U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997)). When considering a motion to dismiss, “[i]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss.” Pennsylvania ex rel. Zimmerman v. Pepsico, Inc., 836 F.2d 173, 181 (3d Cir. 1988) (citing Car Carriers, 745 F.2d at 1107). The movant carries the burden of demonstrating that dismissal is appropriate. Intel Corp., 496 F. Supp. 2d at 408. However, Bankruptcy Rule 7009 further provides that Fed.R.Civ.P. 9 applies in adversary proceedings. While Fed.R.Civ.P. 9(b) provides that: “all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity,” Rule 9(b) only applies to allegations of actual fraud. Furthermore, this Court takes the view that claims of constructive fraud, i.e. fraudulent transfers, are evaluated using Rule 8(a)(2). 5 5 Brandt v. B.A. Capital Co. LP (In re Plassein Int’l Corp.), 352 B.R. 36, (Bankr. D. Del. 2006) (“Accordingly, the Court joins with those decisions that have (either implicitly or explicitly) evaluated fraudulent transfer complaints using Rule 8(a)(2)'s notice pleading standard”) Id. at 40-41. See. e.g., Giuliano v. U.S. Nursing Corp. ( In re Lexington Healthcare Group, Inc.), 339 B.R. 570, 574-75 (Bankr.D.Del.2006) (applying “liberal notice pleading standard”); AstroPower, 335 B.R. at 333 (holding that a fraudulent transfer complaint “need only set forth the facts with sufficient particularity to apprise the defendant fairly of the charges made against him”); Official Comm. of Unsecured Creditors v. DVI Bus. Credit, Inc. ( In re DVI, Inc.), 326 B.R. 301, 305-306 (Bankr.D.Del.2005) (applying Rule 8(a) (2)); Tese-Milner v. TPAC, LLC ( In re Ticketplanet.com), (continued...) 7 A fraudulent transfer complaint “need only set forth the facts with sufficient particularity to apprise the defendant fairly of the charges made against him.” In re Astro Power Liquidating Trust, 335 B.R. 309, 333 (Bankr. D. Del. 2005) (holding that a constructive fraud count need not comply with Rule 9's heightened pleading standard). Fed.R.Civ.P. 8(a), made applicable to this proceeding by Fed. R. Bankr.P. 7008, requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” A plaintiff need not set out in detail the facts upon which he bases his claim, so long as he gives the defendant(s) fair notice of what the claim is and the grounds upon which it rests. Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 167, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993) (quoting Conley, 355 U.S. at 47, 78 S.Ct. 99). In reference to a constructive fraud claim, the Court has stated: “[a]ll that is needed at this stage is an allegation that there was a transfer for less than reasonably equivalent value at a time when the Debtors were insolvent.” In re DVI, 2008 WL 4239120, at *9 (Bankr. D. Del. Sept. 16, 2008) (finding complaint sufficient because “the Trustee has identified the transfer by date and face amount and has alleged that it was for no consideration”). (...continued) 313 B.R. 46, 68 (Bankr.S.D.N.Y.2004) ( “While there is authority to the contrary, the better and majority rule is that a claim for constructive fraud .. need not be pleaded with particularity ....”); Nisselson v. Drew Indus. (In re White Metal Rolling & Stamping Corp.), 222 B.R. 417, 429 (Bankr.S.D.N.Y.1998) (“[T]he sole consideration should be whether, consistent with the requirements of Rule 8(a), the complaint gives the defendant sufficient notice to prepare an answer, frame discovery and defend against the charges.”). 8 DISCUSSION The claims against Target in Counts I and II of the Amended Complaint are for fraudulent transfer, and Count V of the Amended Complaint alleges a breach of fiduciary duty. In reference to the fraudulent transfer issue, Debtor alleges actual fraud and constructive fraud through a series of transactions that occurred in September 2004. The Court Will Not Consider Some Documents in Target’s Appendix As a preliminary matter, Target attached an Appendix with exhibits in support of the Motion, including press releases, affidavits, wire transfer documents, Debtor’s operating agreement and a cash flow statement. Target claims that these exhibits fall under the Third Circuit’s “integral exception” doctrine because they are all a part of the Agreement. In In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410 (3d. Cir. 1997), the Third Circuit formulated a narrow exception to Fed.R.Civ.P. 12 (d). The court held that “ a document integral to or explicitly relied upon in the complaint may be considered without converting the motion into one for summary judgment.” Id. at 1426. Additionally, another exception to Rule 12(b) exists and that is the public record exception. In the Third Circuit, courts may take judicial notice of public records to acknowledge that the facts contained in the records existed in the public realm at that time. Benak v. Alliance Capital Mgmt L.P., 435 F.3d 396, 401 (3d Cir. 2006). The court may not, however, consider the truth of the information in the records. Id. 9 The Court will take judicial notice of the press releases and will further consider the commitment letters and the Agreement; however, the affidavit, operating agreement, cash flow statement and wire transfer documents will be excluded in considering the Motion. The Court is taking judicial notice of the press releases because they are public documents. However, the documents will not be considered for truth or veracity. Benak, 435 F.3d at 401; see also In re Nuvelo, Inc., Sec. Litig., 2008 WL 5114325, at *2 (N.D. Cal. Dec. 4, 2008)(the court took judicial notice of SEC filings and press releases but not for the purposes of truth or veracity.). The Court will also consider the Agreement and commitment letters because these documents fall within the “integral” exception. As the Third Circuit stated in Burlington Coat, “the rationale underlying this exception is that the primary problem raised by looking to documents outside the complaint-lack of notice to the plaintiff-is dissipated.” Burlington Coat, 114 F.3d at 1426. Here, both parties are on notice as to the Agreement and commitment letters. Not only has Target relied upon them in the Motion, but Debtor heavily relies on these documents in its Amended Complaint. If these documents did not give Debtor notice or were in any way inaccurate, Debtor would not have relied on them in the Amended Complaint. Debtor did not rely upon the affidavit, wire transfers, operating agreement and cash flow statements in the Amended Complaint. 10