Court Opinion

ID: 4106576
Source: CourtListenerOpinion
Date Created: 2016-12-12 21:04:34.336237+00
Date Added: 2024-06-11T13:16:11.746106
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

DAVID M. KLAUDER, IN HIS             )
CAPACITY AS THE CHAPTER 7            )        No. 133, 2016
TRUSTEE FOR THE BANK-                )
RUPTCY ESTATE OF RAYTRANS            )
HOLDINGS, INC.,                      )        Court Below - Court of Chancery
                                     )        of the State of Delaware
       Cross-Plaintiff Below/        )
       Appellant,                    )
                                     )        C.A. No. 7994
and                                  )
                                     )
SPRING REAL ESTATE, LLC              )
d/b/a/ SPRING CAPITAL GROUP, )
                                     )
       Plaintiff Below / Appellant,  )
                                     )
       v.                            )
                                     )
ECHO/RT HOLDINGS, LLC and            )
ECHO GLOBAL LOGISTICS, INC., )
                                     )
       Defendants and Cross-         )
       Defendants Below / Appellees. )

                           Submitted: October 25, 2016
                           Decided: December 12, 2016

Before VALIHURA, VAUGHN and SEITZ, Justices.

                                      ORDER

      This 12th day of December 2016, upon consideration of the parties’ briefs, oral

argument, and the record of the case, it appears that:

      1. Two appellants, Spring Real Estate, LLC (“Spring Real Estate”) and David
M. Klauder (“Trustee”), Trustee in Bankruptcy for RayTrans Holdings, Inc.

(“RayTrans Holdings”), appeal Court of Chancery decisions dismissing claims which

they asserted in that court.

      2. Spring Real Estate appeals from a December 31, 2013 decision which

dismissed fraudulent conveyance and related claims it asserted against Echo/RT

Holdings, LLC (“Echo/RT”) and Echo Global Logistics, Inc. (“Echo”), and from a

January 24, 2014 decision denying its motion for reargument. Those claims arose out

of a sale of assets in which RayTrans Distribution Services, Inc. (“RayTrans

Distribution”) sold substantially all of its assets to Echo/RT in 2009.     Under the

sales agreement, RayTrans Distribution was paid $6,050,000 at settlement and was

entitled to receive up to an additional $6,500,000 over three years based on an earn-

out formula. Apparently none of the potential $6,500,000 earn-out money was ever

paid and it is not at all clear that any part of it is due. Echo is involved because it

guaranteed Echo/RT’s payment obligations under the sales agreement. Spring Real

Estate became a judgment creditor of RayTrans Distribution after RayTrans

Distribution sold its assets to Echo/Rt. RayTrans Distribution was a wholly owned

subsidiary of RayTrans Holdings. RayTrans Holdings filed a Chapter 7 petition in

bankruptcy during the pendency of the Court of Chancery action.

      3. The Trustee appeals from a February 18, 2016 decision dismissing claims

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which he filed against RayTrans Distribution, Echo/RT and Echo. Those claims were

also fraudulent conveyance claims arising out of the same 2009 sale of assets from

RayTrans Distribution to Echo/RT. The Trustee’s claims were dismissed by the

Court of Chancery on the grounds that the Trustee lacked standing to assert a

fraudulent conveyance claim against Echo/RT and Echo and that he did not

adequately plead a fraudulent conveyance. We will first address the Trustee’s appeal.

      4. The Court of Chancery found that the Trustee lacked standing because the

transfer from RayTrans Distribution to Echo/RT was a transfer made by a subsidiary

of the debtor in bankruptcy, not the debtor in bankruptcy itself (RayTrans Holdings).

It’s reasoning is set forth as follows:

             While the Trustee accurately defines the property in the
             debtor’s estate, his application of the definition to the
             assets in question is contrary to established law. A
             challenged transfer “must be a transfer of an interest of the
             debtor in property.” Property of the debtor “is best
             understood as that property that would have been part of
             the estate had it not been transferred before the
             commencement of bankruptcy proceedings.” Accordingly,
             the debtor’s property consists of “all legal or equitable
             interests of the debtor in property as of the commencement
             of the case,” regardless of where it is located or by whom
             it is held. Courts first look to state law “in determining
             whether the debtor has an interest in the property.” Under
             state law,

                 [t]he property of a debtor’s estate generally does
                 not include the property of the debtor’s non-filing

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    subsidiaries. The debtor’s estate includes the
    debtor’s equity interest in its subsidiary, but not the
    subsidiary’s assets. This distinction flows from the
    basic principle under the state corporate law that a
    corporation is a separate legal entity from its
    shareholders. Simply put, a “parent’s ownership of
    all of the shares of the subsidiary does not make
    the subsidiary’s assets the parent’s.”

Further, an act of a subsidiary that decreases the value of
the shares of the subsidiary owned by its parent does not
confer to a trustee of the parent standing to challenge the
subsidiary’s transfer.

       One exception exists to the general rule that a parent
has no property interest in the assets of a subsidiary. This
general rule is based on the premise that a corporation’s
assets are owned by the corporation, which is considered
by state law to be a legal entity distinct from its
shareholders. Thus, where the subsidiary is a mere alter
ego of the parent to the extent that the Court may engage in
“reverse veil-piercing,” the Court may treat the assets of
the subsidiary as those of the parent for the purposes of a
trustee’s standing to void allegedly fraudulent transfers of
such assets.

       Here, the Trustee asserts an interest not in Holding’
assets, but in those of RayTrans Distribution, Holding’
wholly-owned subsidiary. Nowhere in the Cross-Claims or
the Trustee’s Answering Brief does the Trustee allege that
RayTrans Distribution was an “alter ego” of Holdings, or
that the Court should for any other reason disregard the
separate corporate structures. Thus, Holdings has no direct
interest in the assets of RayTrans Distribution, and the
Trustee has no standing to assert that the Defendants’

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                transfer of assets pursuant to the APA was fraudulent.1

       5. RayTrans Distribution was an Illinois corporation. Shortly after it sold its

assets to Echo/RT, RayTrans Distribution was allowed to dissolve by operation of

Illinois law.

       6. On appeal, the Trustee contends that under Illinois law, when RayTrans

Distribution was dissolved, its assets, including the right to assert any claims it held,

vested in its sole shareholder, RayTrans Holding. He contends that its assets include

the right to file an action against Echo/RT and Echo to seek earn-out payments which

may be owed by Echo/RT, and that the dissolution vests him with standing, as

RayTrans Holdings Trustee, to file a fraudulent conveyance action against Echo/RT

and Echo.

       7. The argument that RayTrans Distribution’s assets vested in RayTrans

Holdings when RayTrans Distribution dissolved was not fairly presented to the Court

of Chancery and may not be raised on appeal under Rule 8. It is not discussed in the

Trustee’s written opposition to the motion to dismiss and was not considered by the

Court of Chancery. The Trustee points to a single reference to the issue at oral

argument on the motion. We have recently ruled that a short reference to an issue in

1
  Spring Real Estate LLC v. Echo/RT Holdings, LLC, 2016 WL 769586, at *3 (Del. Ch. Feb. 18, 2016)
(citations omitted).

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an oral argument, where prior briefing has taken place, is not sufficient to fairly

    present an issue to a trial court.2 We apply that ruling here.

          8. We agree with the Court of Chancery’s analysis and its conclusion that the

Trustee lacks standing to assert claims against Echo/RT and Echo. We affirm that

ruling. We need not address the Court of Chancery’s finding that the Trustee did not

adequately plead a fraudulent conveyance.

          9. We now turn to Spring Real Estate’s appeal. It initiated this litigation by

filing its fraudulent conveyance and related claims against Echo/RT and Echo. It

later added RayTrans Distribution, RayTrans Holdings, and James A. Ray, the

principal owner of the RayTrans companies, as nominal defendants. RayTrans

Holdings filed its bankruptcy petition before the Court of Chancery issued its

December 31, 2013 decision dismissing Spring Real Estate’s claims. Spring Real

Estate and the Trustee contend that the bankruptcy automatic stay arising from

RayTrans Holdings’ bankruptcy stayed Spring Real Estate’s action against Echo/RT

and Echo and that the December 31, 2013 decision is therefore void, even though

2
  The Roofers, Inc. v. Del. Dep’t of Labor, 2014 WL 7010733, at *1 (Del. Nov. 24, 2014). The
Trustee contends that this argument was not waived, citing our Opinion in North River Insurance
Company v. Mine Safety Appliances Company, 105 A.3d 369 (Del. 2014). North River does not
support the Trustee’s position. North River does not stand for the proposition that any issue
mentioned at oral argument before the trial court will be deemed to have been “fairly presented”
to the trial court. The argument referred to in North River was of a factual nature - as opposed to
an entirely new legal theory, and there, the related legal issues were discussed at length by both
the parties and the Court of Chancery.

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Spring Real Estate continued to litigate its claims in the Court of Chancery without

objection from the Trustee after RayTrans Holdings filed its bankruptcy petition.

       10. The contention of Spring Real Estate and the Trustee that RayTrans

Holdings’ bankruptcy filing stayed Spring Real Estate’s action against Echo/RT and

Echo is untenable and must be rejected. The automatic stay in bankruptcy stays

actions taken against the debtor or the debtor’s property.3 Echo/RT and Echo are not

debtors in bankruptcy. In this order we are approving the Court of Chancery’s ruling

that the Trustee had no standing to proceed against Echo/RT or Echo, which

encompasses a finding that assets conveyed to Echo/RT were not property of the

debtor, RayTrans Holdings. For these reasons, there is no legal basis upon which to

conclude that Spring Real Estate’s claims against Echo/RT and Echo were stayed.

The Court of Chancery decision of December 31, 2013 is not void.

       NOW, THEREFORE, IT IS THE ORDER of the Court that the judgment of the

Court of Chancery is AFFIRMED.

                                           BY THE COURT:

                                           /s/ James T. Vaughn, Jr.
                                                   Justice

3
 In re Conference of African Union First Colored Methodist Protestant Church, 184 B.R. 207,
2014 (Bankr. D. Del. 1995).

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