The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District
Plaintiffs Roselink Investors, L.L.C., Zigmunt Wilf, BNE Associates,
David Halpern, Davanne Realty Co., Inc., and Andrew Abramson
(collectively "Creditors") purchased Units offered in a private offering
by Crown Books Corp. ("Crown Books") and Crownbooks.com ("CB.com"), a
wholly-owned subsidiary of Crown Books responsible for Crown Books'
Internet sales. Creditors purchased the Units in exchange for (i) a
promissory note in a principal value equal to the purchase price of each
Unit, and (ii) a warrant to purchase common stock in Crown Books at a
fixed exercise price. Defendants Mark Shenkman and Charles Cumello were
directors of CB.com. Creditors have sued defendants for breaches of
fiduciary duties, fraudulent transfer, and tortious interference with
contractual relations. Both parties have moved for summary judgment. For
the reasons stated below, defendants' motion is granted.
Plaintiff Roselink Investors, LLC is a New Jersey limited liability
company with its principal place of business in New Jersey. (Compl. ¶
4) Roselink's members reside in New Jersey or Pennsylviania.
(Id.) Plaintiff Zigmunt Wilf resides in New Jersey.
(Id. at ¶ 5) Plaintiff BNE Associates is a New Jersey partnership, and all its partners are residents of New
Jersey. (Id. at ¶ 6) Plaintiff David Halpern resides in New
Jersey. (Id. at ¶ 7) Plaintiff Davanne Realty Co. is a New
Jersey corporation with its principal place of business in New Jersey.
(Id. at. ¶ 8) Plaintiff Andrew Abramson resides in New
Jersey. (Id. at ¶ 9) Defendant Mark Shenkman resides in
Connecticut. (Id. at ¶ 10) Defendant Charles Cumello
resides in Maryland. (Id. at ¶ 11) Therefore, subject
matter jurisdiction arises under 28 U.S.C. § 1332(a)(1). Venue is
proper in this district pursuant to 28 U.S.C. § 1391(a)(2) because a
substantial part of the events giving rise to this action occurred within
The following facts are either undisputed or are presented in the light
most favorable to plaintiffs. See Matsushita Elec. Indus. Co.
v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986)
Crown Books is a Delaware corporation based in Maryland. (Id.
at ¶ 12) After becoming one of the country's top discount retailers
of books and book-related products, Crown Books filed a voluntary
petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code,
11 U.S.C. § 101 (2000), in July 1998. (Id. at ¶ 12-13) Crown Books emerged from
bankruptcy with two working capital loans provided by Paragon Capital LLC
("Paragon") and Foothill Capital Corporation ("Foothill"). (Id.
at ¶ 14) Substantially all of Crown Books' assets were pledged to
In December 1999, Crown Books formed CB.com, also a Delaware
corporation, a wholly-owned subsidiary that was to pursue an Internet
retail sales strategy. (Id. at ¶ 16) Crown Books estimated
that its total costs to implement this Internet strategy would range from
$3 million to $7 million, excluding marketing expenses. (Id. at
¶ 17) To raise the necessary funds, Crown Books and CB.com extended a
private offering to accredited investors on December 14, 1999.
(Id. at ¶ 18) The private offering was for a minimum of ten
and a maximum of 20 Units, each of which consisted of a three-year 6%
subordinated promissory note to CB.com in the principal amount of
$500,000, and a three-year warrant to purchase 183, 824 shares of common
stock of Crown Books at $2.72 per share. (Defendants' Statement Pursuant
to Local Civil Rule 56.1 ("Deft. Stmt."), Ex. A at i)
About February 23, 2000, Creditors entered into subscription agreements
with Crown Books and CB.com. (Compl. ¶ 19) Creditors purchased Units
with an aggregate principal amount of more than $1 million.
(Id. at ¶ 20) The private offering closed in March 2000
after raising approximately $4 million, $1 million of which was transferred immediately to Crown Books from
CB.com. (Id. at ¶ 25) By January 2001, the functionality of
CB.com's website was about 80% complete. (Id. at ¶ 26)
In the latter part of 2000, Crown Books found itself with accelerated
holiday inventory receipts, unplanned trade payments for these receipts,
and sales trends that were lower than reflected in its business plan.
(Id. at ¶ 27) On December 8, 2000, Crown Books entered into
an agreement with Paragon and Foothill to seek capital to lower its debt.
(Id. at ¶ 28) The agreement obligated Crown Books to pay
$1.5 million on or before December 12, 2000, at least $2 million on or
before January 10, 2001, and at least $1.5 million on or before February
15, 2001. (Deft. Stmt., Ex. G at 2) About December 11, 2000, Shenkman and
Cumello authorized a loan of $1.5 million from CB.com to Crown Books
("the Loan"). (Compl. ¶ 30) Two months later, Crown Books filed
another voluntary petition for relief under Chapter 11 of the Bankruptcy
Code. (Id. at ¶ 36)
Plaintiffs have brought seven claims for relief against Creditors.
Claim One is for breach of fiduciary duty. Claim Two is for breach of the
duty of loyalty. Claim Three is for breach of the duty of good faith.
Claim Four is for common law wrongful transfer of funds. Claim Five is
for violation of § 1304(a)(2) of the Delaware Uniform Fraudulent
Transfer Act. Claim Six is for violation of § 1305(a) of the Delaware
Uniform Fraudulent Transfer Act. Claim Seven is for tortious interference with
A. Breach of Fiduciary Duty Claims
Creditors allege that defendants, as directors of CB.com, owed them
fiduciary duties of due care, loyalty and good faith. (Compl. ¶¶ 38,
45, 52) According to Creditors, defendants owed them fiduciary duties
because CB.com was insolvent "when the Loan was made or was rendered
insolvent by the Loan." (Id. at ¶ 38) Creditors claim that
by making the Loan defendants breached their fiduciary duties.
(Id. at ¶¶ 39-42, 46-49, 53-56) The threshold question is
whether defendants owed Creditors any fiduciary duties. If so, the next
question is whether defendants breached these duties. Delaware law, upon
which the parties have relied, controls. See Texaco A/S
(Denmark) v. Commercial Ins. Co. of Newark, NJ,
160 F.3d 124, 128 (2d Cir. 1998) (parties' consent to application of forum
law completes choice of law inquiry); American Fuel Corp. v.
Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997)
1. Did defendants owe plaintiffs any fiduciary duties?
Under Delaware law, when one company wholly owns another, the directors
of the parent and the subsidiary are obligated to manage the affairs of the subsidiary in the best
interests only of the parent and its shareholders. See Anadarko
Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1174
(Del. 1988) (dismissing subsidiary's claim against parent corporation
and three former directors of the subsidiary for breach of fiduciary duty
by modifying contracts between subsidiary and parent); Dennis J. Block,
Nancy E. Barton & Stephen A. Radin, THE BUSINESS JUDGMENT RULE:
FIDUCIARY DUTIES OF CORPORATE DIRECTORS 376 (5th ed. 2002). However,
"where a corporation is operating in the vicinity of insolvency, a board
of directors is not merely the agent of the residue risk bearers, but
owes its duty to the corporate enterprise." Credit Lyonnais Bank
Nederland, N.V. v. Pathe Communications Corp., Civ. A. No.
12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991). Delaware law
requires that directors
recognize that in managing the business affairs of
a solvent corporation in the vicinity of
insolvency, circumstances may arise when the right
(both the efficient and the fair) course to follow
for the corporation may diverge from the choice
that the stockholders (or the creditors, or the
employees, or any single group interested in the
corporation) would make if given the opportunity
Id. at n.55. Once a corporation enters "the zone of
insolvency," the directors owe fiduciary duties not only to the
corporation's shareholders but to its creditors as well. See
Geyer v. Ingersoll Publications Co., 621 A.2d 784, 791
(Del. Ch. 1992). This means that directors of a wholly-owned subsidiary, who
otherwise would owe fiduciary duties only to the parent, also owe
fiduciary duties to creditors of the subsidiary when the subsidiary
enters "the zone of insolvency."
There is no dispute here that CB.com was at least within "the zone of
insolvency" when defendants made the Loan. Indeed, the facts show that
CB.com was insolvent from the moment it was formed. All of its $4 million
of capital was acquired through the private offering, in which promissory
notes were issued in exchange for Units. (Plaintiffs' Counterstatement of
Undisputed Facts ("Pl. Cstmt.") ¶¶ 18-23) Because Crown Books decided
to raise the capital through loans rather than a stock offering, CB.com's
liabilities exceeded its assets when the Units were issued, which
rendered CB.com insolvent from inception. "[A]n entity is insolvent when
it has liabilities in excess of a reasonable market value of assets
held." Geyer, 621 A.2d at 789; see also BLACK'S LAW
DICTIONARY 799 (7th ed. 1999) (defining "insolvent" as ...