Opinion ID: 145387
Heading Depth: 2
Heading Rank: 2

Heading: The Decline of Far & Wide

Text: Time and circumstance, however, intervened in Far & Wide’s plan. Fewer travelers took overseas trips after the September 11, 2001, terrorist attacks and the 4 subsequent outbreak of the SARS virus in Asia. Far & Wide faced a liquidity crises when the companies it owned and relied upon for operating funds faltered because of the struggling travel market. As a result, Far & Wide defaulted on the $70 million bank loan. After defaulting, Wellspring and the Individual Defendants represented to the banks that a single purchaser could still be found to purchase the consolidated travel enterprises. Based on these representations, the banks, which could have foreclosed, instead entered into a forbearance agreement. The banks, however, required the Debtors to hire consultants to aid in the daily operations of the Debtors’ business. In 2002, Far & Wide hired an outside company to solicit potential purchasers. Pursuant to its agreement with the banks, Far & Wide also hired KPMG and The Recovery Group (“TRG”), a firm specializing in turnaround and crisis management. KPMG was retained to review Far & Wide’s records and to advise the directors and officers on how better to keep the company’s books and records. Far & Wide’s management neither implemented TRG’s recommendations, nor implemented the bookkeeping and other advice it received from KPMG. The Trustee alleges that Wellspring and the Individual Defendants, in their attempt to sell the travel enterprises for a sufficient price to obtain a return on their 5 investment, used false and misleading indicators of the Debtors’ financial health. In addition, the Trustee alleges that Wellspring and Far & Wide chose not to file for bankruptcy or wind down the Debtors at that time because it would have caused them to lose their $45 million investment. The Trustee alleged Far & Wide was insolvent by April 2002. In October 2002, the Debtors began a reorganization. Part of that reorganization included two $10 million loans. The Debtors sought and obtained consent to the loans and the restructuring from major creditors. One of the loans came from Wellspring, which charged an interest rate of 10% over prime and not less than 14.75%. Additionally, Wellspring insisted that its loan be repaid before all the claims of the Debtors’ other creditors were paid. Wellspring and the Individual Defendants also converted a portion of Wellspring’s equity position into a debt claim, which would have higher priority in the event of a bankruptcy. These loans allowed the Debtors to continue operating their businesses. Even though the conditions were arguably unfairly favorable to Wellspring, the Debtors do not allege that Wellspring received any benefit as a result of the loan agreement, which was never repaid. Nor was there any allegation that the loan could have been obtained on more favorable terms. Certain of the Trustee’s claims in the district court, however, seek to subordinate the Wellspring loan to 6 other creditors’ obligations and to recharacterize Wellspring’s $12 million dollar debt claims as equity. The district court denied the motion to dismiss these claims, and the Trustee continues to pursue them in district court. In July 2003, when the two $10 million loans came due, the Debtors could not repay the loans. Despite being insolvent, the Debtors continued operating the travel businesses, selling trips to customers, and purchasing services from vendors until September 23, 2003. Between July 2003 and September 23, 2003, the Debtors used customers’ deposits to pay operating costs. Some of those customers lost their deposits and did not receive their travel arrangements because of the bankruptcy. These customers have priority bankruptcy claims of more than $5.6 million. After bankruptcy, assets for which the Debtors had paid $150 million were sold for a net of $14 million. C. The Trustee’s Allegations in the Complaint and Amended Complaint The Trustee brought a number of claims against Wellspring and the Individual Defendants based on their having exercised control of the Far & Wide entities. The Trustee stated the following claims in the original Complaint: 1. The individual directors and officers of Far & Wide breached their fiduciary duties to the Debtors. 7 2. These individuals also breached their fiduciary duties to the Debtors’ creditors. 3. These individuals aided and abetted each other in breaching their fiduciary duties to the Debtors and to Debtors’ creditors. 4. Wellspring aided and abetted the Individual Defendants’ breaches of their fiduciary duties to both the Debtors and the Debtors’ creditors. 5. The claims of the Individual Defendants against the bankruptcy estate should be equitably subordinated in the bankruptcy to the claims of other creditors. 6. Wellspring misstated its purported debt claims in the bankruptcy and the debt claims should be recharacterized as equity. 7. Wellspring’s claims against the bankruptcy estate should also be equitably subordinated to the claims of the other creditors. 8. Ernst & Young, LLP (“Ernst & Young”), who prepared audited financial statements for the Debtors, aided and abetted the breach of fiduciary duties by Wellspring and the Individual Defendants, breached their duty of care to the Debtors and the Debtors’ creditors, and committed professional malpractice. 8 Subsequently, Ernst & Young and the Trustee agreed to submit the claims against Ernst & Young to arbitration, and the district court granted Ernst & Young’s motion to compel arbitration. After Ernst & Young was removed, Wellspring and the Individual Defendants moved to dismiss the Complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The district court denied Wellspring’s and the Individual Defendants’ motion to dismiss the claims for subordination and for recharacterization of debt (numbers five, six, and seven above), which continue before the district court. The district court dismissed the remaining claims (numbers one, two, three, and four above). With the Court’s permission, Appellant filed an 82 page Amended Complaint on December 5, 2007, which included the following claims: a. Direct claims of the Debtors against Wellspring and the Individual Defendants for breach of fiduciary duties. b. Derivative claims of the Debtors’ creditors alleging that Wellspring and the Individual Defendants breached fiduciary duties to the Debtors. c. Direct claims of the Debtors against Wellspring and the Individual Defendants for deceptive and unfair trade practices. 9 d. Direct Claims by the Debtors against Wellspring and the Individual Defendants for aiding and abetting each other’s breach of their fiduciary duties. e. Derivative Claims by the Debtors’ creditors against Wellspring and the Individual Defendants for aiding and abetting each other’s breach of their fiduciary duties. Wellspring and the Individual Defendants moved to dismiss the Amended Complaint. The district court granted the motion, dismissed the Amended Complaint, and entered partial final judgment pursuant to Rule 54(b) of the Federal Rules of Civil Procedure so that the Trustee could appeal the dismissal of the breach of fiduciary duty claims while the claims for subordination and for recharacterization of debt proceeded in the district court. D. The Issues on Appeal Appellant appeals the district court’s dismissal of the Debtors’ direct claims for breach of fiduciary duty by Appellees, the dismissal of the Debtors’ creditors’ direct claims against Appellees for breach of fiduciary duty owed to them, and the dismissal of the creditors’ derivative claims against Appellees. Appellant also appeals the dismissal of the related aiding and abetting claims. Finally, Appellant appeals the district court’s decision to apply Delaware rather than Florida law to 10 the fiduciary duty claims. Appellant does not appeal the dismissal of the deceptive trade practices claims (claim c. above) or the dismissal of the claims against Ernst & Young (claim 8. above), which were compelled to arbitration. The equitable subordination claims, the claim for recharacterization of Wellspring’s (claims 5., 6., and 7. above) debt as equity, and a claim against Wellspring for disallowance of a claim in bankruptcy continue in the district court.