NHB Assignments, LLC v. General Atlantic, LLC and Braden Kelly (In re PMTS Liquidating Corp., et al.) Case No. 08-11551 (BLS) (Bankr. D. Del. July 1, 2011)  

CASE SNAPSHOT

The liquidating trustee appointed by the confirmed chapter 11 plan brought an adversary proceeding against a minority investor of the debtor, and a former director of the debtor, alleging that: the investor and the director had breached the fiduciary duties owed to the debtor, and the investor had defrauded the debtor. The liquidating trustee further alleged that the investor had led the debtor to believe that the investor would continue to provide financial backing, despite the investor’s interest in investing in a direct competitor of the debtor’s. The liquidating trustee also alleged that the former director (who was also a managing member of the minority investor), breached his fiduciary duty of good faith because the director knew of the overtures made by the investor to the debtor’s competitor, and did not disclose those overtures to the debtor. The court granted the investor’s motions to dismiss, but denied the director’s motion to dismiss.  

FACTUAL BACKGROUND

ProxyMed, a Florida corporation, provided health care transactions processing services to doctors’ offices. General Atlantic, LLC, a private equity firm, invested approximately $25 million in ProxyMed and owned approximately 27 percent of the outstanding shares. Braden Kelly, a managing member of General Atlantic, had been named to the board of directors of ProxyMed following GA’s initial investment in ProxyMed in 2002. GA participated in the funding of some of ProxyMed’s acquisitions, including raising $24 million for the acquisition of a medical billing company.

In 2005, ProxyMed began to search for a new CEO. Kelly played a central role in that search, and focused on John Lettko. During the interview process and after his hiring, Lettko sought assurances from Kelly that GA would continue to provide, as needed, additional capital to support the success of ProxyMed. The liquidating trustee alleged that Lettko received such assurances. Kelly also played a major role in advising Lettko of important decisions, such as employee hiring and compensation, trademark issues, investor relations and press releases.  

At the May 2005 board meeting, Lettko suggested that ProxyMed acquire more preferred provider organizations. The liquidating trustee alleged that, at the same meeting, Kelly stated that GA would either “lead or follow the financing” of the PPO acquisitions. Lettko pursued this strategy, and entered into serious negotiations with a specific PPO. Lettko sought Kelly’s assistance with financing, and early in September 2006, the managing director of GA met with Lettko in New York to discuss the possibility of providing further financing to ProxyMed. On that same day, GA’s managing director sent an email to other GA principals, stating that further investment in ProxyMed was a “long shot.” A week after that, Kelly again represented to Lettko that, while GA would probably not lead the financing for the acquisition, it was “likely interested in participating on a pro rata basis.”

Meanwhile, in February 2006, Emdeon Corporation, a significant competitor of ProxyMed, announced that it had received inquiries regarding the sale of some of its business units. Subsequently, Lettko suggested to Kelly that ProxyMed consider proposing a merger between itself and Emdeon. Emdeon declined the proposal, and GA began to pursue an investment in Emdeon on its own. The liquidating trustee alleged that on August 1, 2006, Emdeon raised concerns as to GA’s ownership stake in ProxyMed, and sought assurances that the ownership would not constitute an impediment to GA’s investment in Emdeon. Kelly met with Emdeon’s CEO and provided such assurances. GA conducted a due diligence review of Emdeon over the next few months. All of this was done without the knowledge of ProxyMed, which continued to conduct PPO negotiations in the belief that GA would help with financing.  

Within a week of meeting with the managing director of GA, Lettko laid out his investment strategy to GA, in the hope of obtaining financial backing to acquire the targeted PPO. A few days later, a GA managing director discussed the Emdeon investment with Kelly, who indicated that he thought the Emdeon deal represented a better opportunity than the ProxyMed deal. By the end of September, GA announced its deal with Emdeon, and informed Lettko that it would not provide any further financing to ProxyMed. ProxyMed sought financing from other sources, to no avail.  

In July 2008, ProxyMed filed its chapter 11 petition, after which it conducted a successful sale under section 363 of the Bankruptcy Code. ProxyMed obtained confirmation of its plan of liquidation a year later. Under the plan, the liquidating trustee assumed control over ProxyMed’s remaining assets, including causes of action. The trustee filed suit against GA and Kelly for breach of fiduciary duty, and against GA for fraud. The defendants moved to dismiss the complaint.  

COURT ANALYSIS

In ruling on a motion to dismiss for failure to state a claim upon which relief can be granted, the court is required to accept all well-pleaded claims as true, and construe them in a light most favorable to the plaintiff.  

Breach of Fiduciary Duty—The liquidating trustee argued that New York law governed this suit, because the agreement between ProxyMed and GA contained a choice of law provision designating New York law, and because the conduct giving rise to the breach of duty claims occurred primarily in New York. Under New York law, the trustee asserted two grounds for this count against GA—it occupied a “position of trust and confidence” with ProxyMed, and it exerted control and influence over ProxyMed. The trustee argued that Kelly concealed his conflict of interest resulting from GA’s pursuit of Emdeon, misrepresented that interest when making additional investments in ProxyMed, and failed to inform ProxyMed that it should not rely on GA for further financing—all violations of his duties of loyalty and candor.

Both defendants alleged that the dispute was governed by Florida law (the state of ProxyMed’s incorporation), and that Florida law looked to Delaware on issues of corporate law. GA further argued that, as a minority shareholder, it did not owe a fiduciary duty to ProxyMed, and that it did not exercise control over ProxyMed so as to fit within a narrow exception that creates a duty for a minority shareholder. GA asserted that the trustee’s allegations were instances of Kelly’s individual conduct in his capacity as a ProxyMed director, and that the complaint failed to allege that GA controlled Kelly’s actions. Kelly argued that the complaint failed to allege facts establishing a breach of the duties of loyalty and candor because there were no allegations of financial self-dealing.

The court ruled that Florida law applied because the bankruptcy case was pending in Delaware, and Delaware’s choice-of-laws principles regarding corporate governance required the court to look to the state of incorporation, which was Florida. In turn, Florida courts looked to Delaware law for corporate disputes.

Applying Delaware corporate law, the court noted that a fiduciary duty may arise with respect to a minority shareholder when a plaintiff alleges “domination by a minority shareholder through actual control of corporation conduct.” (Emphasis in opinion.) “Actual control” requires showing more than the actions a director would normally take in his role as a governing member of a corporate board. For example, another Delaware court had found that a 43 percent shareholder had exercised actual control where the minority shareholder obtained votes in accordance with its wishes and where other directors consistently deferred to this shareholder. Here, the Bankruptcy Court found “nothing extraordinary” about Kelly’s actions as a director that would demonstrate control by GA of ProxyMed. Therefore, the court dismissed this count with respect to GA.

Florida and Delaware law both clearly establish that directors and officers owe fiduciary duties of loyalty and care to the corporation. Prior Delaware caselaw held that the duty of loyalty encompasses cases where the fiduciary fails to act in good faith, and is not limited to financial or other cognizable fiduciary conflict of interest. Thus, the duty of good faith is embedded in the duty of loyalty. Prior caselaw also established that the duty of good faith is breached where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, or demonstrates a conscious disregard of his duties. Here, the trustee alleged that Kelly’s meeting with the Emdeon CEO, ProxyMed’s biggest competitor, to allay Emdeon’s concerns about GA’s investment in ProxyMed, reflected an intention by Kelly to limit ProxyMed’s response to a GA/ Emdeon transaction. Drawing all inferences in a light most favorable to the plaintiff, the court found that the trustee alleged facts sufficient to survive Kelly’s motion to dismiss the count.

Fraud—The trustee based this claim against GA on the detrimental reliance that ProxyMed placed on alleged misrepresentations GA representatives made with respect to providing additional financing. The trustee argued that GA purposely misled ProxyMed of its intention to provide financing, and that, had ProxyMed known GA’s true intentions, ProxyMed would have asked Kelly to step down from the board, and would have sought other avenues of financing. The trustee argued that New York law governed this claim, while GA argued that Delaware law controlled. The court found that, under either jurisdiction’s law, the trustee’s claim failed.

The court denied the trustee’s claim for several reasons. First, the court held that GA’s conduct constituted expressions of opinion as to probable future events, rather than fraudulent conduct. Further, the court found that there was not a special relationship of trust or confidence between GA and ProxyMed that could have elevated the expressions of opinion to the definition of fraud. Additionally, while specific affirmations may be actionable in certain circumstances, generally, predictions are not actionable. Therefore, the trustee’s allegations that Kelly indicated that GA “was likely to” or was “interested in” providing further financing, did not establish fraud. No “credible or plausible allegation” that the speakers knew their statements to be false were made in the complaint. The court therefore held that the trustee’s claim for fraud failed, and dismissed this count.

PRACTICAL CONSIDERATIONS

The liquidating trustee overreached in the pursuit of its claims against GA, and this case maintains the high burden of proof that must be carried by parties seeking claims against former officers, directors and other advisors. GA was not a majority shareholder at any point in its relationship with ProxyMed, and GA did not control ProxyMed or Kelly’s conduct with respect to ProxyMed. Despite the seemingly disingenuous conduct, especially regarding the Emdeon transaction, the court found that this was neither a breach of fiduciary duty, nor fraud. In fact, the court also noted that the parties involved were sophisticated parties, capable of documenting any actual, enforceable commitment; yet, there was no such documentation here. Kelly was in a somewhat more tenuous position, since he was a director of ProxyMed while also a managing member of GA. It is fairly common to find such situations, and so, persons wearing these multiple hats must take extreme care to avoid liability, perhaps avoiding consideration of such delicate matters, and establishing sufficient firewalls.