Designer Equity Holding Company, LLC v. Nexcen Brands, Inc.

NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
)
In re: 	) 	Chapter 7
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DESIGNER EQUITY HOLDING COMPANY,
LLC,
)
)
Case No. 09-17665 (JMP)
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Debtor. 	)
)
)
SALVATORE LAMONICA, CHAPTER 7
TRUSTEE OF DESIGNER EQUITY HOLDING
COMPANY, LLC,
)
)
)
Plaintiff. 	)
)
v. 	) 	Adv. Proc. No. 10-03482 (JMP)
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NEXCEN BRANDS, INC., 	)
Defendant. 	)
)
MEMORANDUM DECISION GRANTING MOTION TO DISMISS
GOLDBERG WEPRIN FINKEL GOLDSTEIN LLP
Attorneys for Salvatore LaMonica, Chapter 7 Trustee of Designer Equity Holding Company,
LLC
1501 Broadway, 22 nd Floor
New York, New York 10036
Kevin J. Nash, Esq.
J. Ted Donovan, Esq.
LITTMAN KROOKS LLP
Attorneys for NexCen Brands, Inc.
570 Lexington Ave., 44th Floor
New York, NY 10022
Barry M. Bordetsky, Esq.
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JAMES M. PECK
United States Bankruptcy Judge
Introduction
NexCen Brands, Inc. (“NexCen”) has moved to dismiss the complaint brought against it
by Designer Equity Holding Company, LLC (“DEHC”). DEHC, now acting through its chapter
7 trustee, seeks damages from NexCen based on four causes of action: breach of contract,
misrepresentations and concealment, breach of the duty of good faith and fair dealing and
negligent misrepresentation. Oral argument on the motion to dismiss (the “Motion”) took place
on October 18, 2011.
This is essentially a partnership dispute. Regardless of the legal theory underlying each
cause of action, when reduced to its essence, DEHC complains that it was duped by a former
business partner resulting in more than $16 million in claimed damages. Plaintiff alleges –
incorrectly – that this is a core proceeding, despite the fact that all claims date back to a
prepetition business dispute between the parties and do not implicate the core jurisdiction of the
Court. Compl. ¶ 7. This plainly is a non-core dispute that could be litigated in another forum,
does not arise in this chapter 11 case and does not directly affect bankruptcy administration. See
28 U.S.C. §§ 157 (b)(3), (c)(1); see also JPMorgan Chase Bank v. Charter Communs.
Operating, LLC (In re Charter Communs.), 409 B.R. 649, 653-54 (Bankr. S.D.N.Y. 2009)
(citations omitted) (noting the non-exhaustive list of core matters provided under 11 U.S.C. §
157, “including issues concerning the administration of the bankruptcy estate, allowance or
disallowance of claims, confirmation of plans, and other proceedings affecting the liquidation of
assets of the estate or the adjustment of the debtor-creditor relationship”).
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Accordingly, this is a familiar prototype of a non-core matter, and arguments raised by
NexCen as to the impact of the Supreme Court’s opinion in Stern v. Marshall, 131 S. Ct. 2594
(2011), are misplaced and have no bearing on this lawsuit. See Reply at 8-9. The current
litigation fits neatly within the existing jurisdictional scheme described in section 157(c)(1) of
title 28 of the United States Code: it is not a core proceeding and is otherwise “related to” a case
under title 11 – the chapter 7 case of DEHC. 28 U.S.C. § 157(c)(1); see also, Joremi Enters. v.
Hershkowitz (In re New 118 th LLC), 396 B.R. 885, 890 (Bankr. S.D.N.Y. 2008) (citations
omitted) (explaining that a “proceeding is ‘related to’ a case under title 11, and falls within its
non-core jurisdiction, if the outcome might have a ‘conceivable effect’ on the estate”).
Furthermore, given the interlocutory character of the relief being granted, the Court has the
unquestioned authority to resolve the Motion by means of this non-final decision. See 28 U.S.C.
§ 157(c)(1).
The damages sought by DEHC allegedly result from claimed acts and omissions of
NexCen in connection with two unrelated transactions. The first involves the purchase of a
licensing business, and the second involves the subsequent sale of that business to another party
for an amount asserted to be less than DEHC itself was prepared to pay. According to the
complaint, NexCen made certain inaccurate and misleading statements to DEHC in anticipation
of the original acquisition that induced DEHC to invest capital in the project to its detriment.
Compl. ¶¶ 11-25. After the acquisition, and following a period of less than stellar operations, it
is asserted that NexCen did not deal fairly with DEHC in its handling of a sale process for the
business and breached its contractual obligation to keep DEHC informed regarding the proposed
sale. Compl. ¶¶ 27-37.
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The underlying subject matter of this litigation is a business that at relevant times held
intellectual property rights relating to use of the “Bill Blass” brand within the apparel industry,
primarily in relation to branded denim products (i.e., jeans) manufactured for sale in North
America. Compl. ¶ 18. NexCen acquired this licensing business on February 15, 2007 from an
entity known as Resource Club, Ltd. (“Resource Club”) for $54.6 million in cash and stock.
Compl. ¶ 20. Following a period of lackluster performance, the business was sold at a
substantial loss,1 allegedly without proper notice to DEHC, to an acquisition entity formed by
Peacock International Holdings LLC (“Peacock”). Compl. ¶ 34. The complaint criticizes the
conduct of NexCen both in acquiring this business from Resource Club without sufficient due
diligence and disclosures and later in selling the business to Peacock for inadequate
consideration without proper notice to DEHC.
As a result of the acquisition from Resource Club, DEHC became the primary licensee
for Bill Blass Jeans in North America. 2 In its complaint, DEHC sets forth claims as a dissatisfied
former minority investor in NexCen’s acquisition vehicle, expressing what amounts to a
combination of both buyer’s remorse and seller’s remorse. The respective rights of DEHC and
NexCen in relation to their ownership interests in the Bill Blass licensing business are set forth in
an Investment Agreement that contains a fairly standard integration clause (everything prior in
time to the date of the agreement loses all independent significance and is merged into the
agreement) and an Amended and Restated Limited Liability Operating Agreement (the “BBJ
1 According to NexCen’s Memorandum of Law in Support of Motion to Dismiss Complaint, the sale price for the
business was $10 million. Br. Supp. at 1. DEHC alleges that this amount was less than what it was prepared to pay
for the business. Compl. ¶ 34.
2 In connection with the acquisition of the Bill Blass intellectual property rights, the principals of DEHC capitalized
it and its affiliate, Designer License Holding Company Inc., to become the primary licensee for Bill Blass jeans and
wearing apparel in North America. Compl. ¶ 18.
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Operating Agreement”) that includes strong and unambiguous exculpatory language clearly
calculated to protect the managing member. See Nam Cert. Ex. 2 (Investment Agreement) 3 ,
Nam Cert. Ex. 3 (BBJ Operating Agreement). NexCen had a major share of the equity, and,
under the BBJ Operating Agreement, functioned as managing member with full control over the
business and the complete discretion and authority to act. Compl. ¶¶ 26, 31.
NexCen relies upon these governing documents that define the relationship between the
members and contends that all of the claims made against it should be dismissed based on
controlling contractual provisions – specifically section 8.7 of the BBJ Operating Agreement and
section 6.05 of the Investment Agreement. Br. Supp. at 5-7. According to NexCen, these
provisions cloak NexCen with total immunity from any and all liability in connection with both
the original acquisition and the later sale of the Bill Blass licensing business. Br. Supp. at 1-2.
Based on a review of the complaint in relation to these provisions, the Court agrees with NexCen
that, as currently structured, the complaint fails to state claims on which relief may be granted
and grants the Motion with leave to the trustee of DEHC to file an amended complaint.
Rule 12(b)(6) Standard
Bankruptcy Rule 7012(b), which incorporates Federal Rule of Civil Procedure 12(b)(6)
(“Rule 12(b)(6)”), permits a bankruptcy court to dismiss an adversary proceeding if a plaintiff’s
complaint fails to state a claim upon which relief may be granted. 	In reviewing a motion to
dismiss under Rule 12(b)(6), the Court accepts the factual allegations of the complaint as true
3 All references to “Nam Cert.” are to that certain Certification of Sue J. Nam, dated October 12, 2010. Defendant
filed the Nam Cert. in connection with the Motion. Although the complaint refers to and cites provisions of the
Investment Agreement and the BBJ Operating Agreement, it does not attach either document. In ruling on a motion
to dismiss, the Court may consider documents omitted from the plaintiff’s complaint but attached by a defendant to
its motion to dismiss. See, e.g., Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d. Cir. 1991) (district
court may consider exhibits omitted from plaintiff’s complaint but attached as exhibits to defendant’s motion papers
because “there was undisputed notice to plaintiffs of their content and they were integral to plaintiff’s claim”).
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and draws all reasonable inferences in the plaintiff’s favor. 	Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007). 	To survive a
challenge to the adequacy of a complaint under Rule 12(b)(6), the factual allegations in a
complaint need to be supported by more than merely conclusory statements. Twombly, 550 U.S.
at 555. The allegations must be sufficient “to raise a right to relief above the speculative level,”
and provide more than a “formulaic recitation of the elements of a cause of action.” Id. In other
words, “only a complaint that states a plausible claim for relief survives a motion to dismiss.”
Iqbal, 129 S. Ct. at 1950. Therefore, “[t]he appropriate inquiry is not whether a plaintiff is likely
to prevail, but whether he is entitled to offer evidence to support his claims.” 	Fernandez v.
Chertoff, 471 F.3d 45, 51 (2d Cir. 2006) (citation omitted).
Discussion
The thrust of the complaint is that DEHC and its principals (individuals named Arnold
Simon and Timothy Fullum) were damaged by NexCen on two separate occasions – initially, at
the time of their original investment, when they were given reason to believe that the business to
be acquired was performing well and had good prospects for the future, and at a later date when
the struggling business was sold to Peacock at a substantial loss without telling them in advance
about the transaction and giving them the option to pay more consideration than Peacock had
offered. DEHC claims that NexCen should be found liable for its conduct both at the formation
stage of the venture and later at the asset disposition phase. The allegation is that NexCen
provided misleading information as to the operations and value of the licensing business when
the deal was originally structured and also breached its contractual obligation to provide
information to DEHC about the transaction with Peacock. In the complaint, DEHC asserts four
causes of action in connection with this central allegation – breach of the BBJ Operating
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Agreement (Count I), misrepresentation and concealment (Count II), breach of the covenant of
good faith and fair dealing (Count III) and negligent misrepresentation (Count IV).
No theory currently asserted by DEHC can survive the Motion due to certain express
limitations of liability in the transaction documents that protect NexCen from the claims made in
the complaint. The first of these is an all-encompassing and conspicuously broad exculpation
section contained in the BBJ Operating Agreement that, on its face, appears to fully exempt
NexCen from any liability for failing to give notice to DEHC of a sale of substantially all of the
assets to Peacock in advance of that sale. Section 8.7 of this agreement provides that the
managing member (NexCen) 4 shall not be liable to any member or subject to injunctive relief for
a failure to give advance notice of the sale of the company’s assets and explicitly states that
NexCen has complete discretion and authority in relation to virtually all activities, including
extraordinary activities, involving the company and its assets. Nam Cert. Ex. 3 at § 8.7. This
freedom to act without liability is consistent with section 8.1 of the agreement that vests all
management authority exclusively in NexCen as managing member. See id. at § 8.1. Although
the exculpation language in section 8.7 is plainly worded and unambiguous, its placement within
a proviso creates an obvious conflict with the obligation of the managing member to provide at
least thirty days’ advance notice of listed actions (including a sale) and to consult with members
with respect to such actions. Nam Cert. Ex. 3 at § 8.7.
As a result, this section is something of a curiosity. The language gives and takes away
at the same time. It sets reasonable expectations as to how the managing member will respect
the interests of the minority member in making important business decisions. But an obligation
4 “Managing Member” is defined in section 1.1 of the BBJ Operating Agreement as NexCen or its successors or
permitted assigns. Nam Cert. Ex. 3 at § 1.1.
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to consult with a minority member of the company that can be disregarded with no repercussions
and without fear of any accountability raises an existential question as to what the parties
actually meant to accomplish in this section of the BBJ Operating Agreement.
Perhaps the language was intended to describe a non-binding standard of conduct in
managing the affairs of the company or to provide some measure of comfort to an otherwise
powerless minority investor, but this is pure speculation and of no significance in deciding the
Motion. Despite the signals within this section that point in opposite directions, the language
clearly states that NexCen shall not be liable for a failure to abide by the agreement to give
notice or to consult. In this respect, the consequences of the exculpation proviso necessarily
must override any contractual management standard because the failure to give notice and
consult is harmless and does not give rise to liability. It is not appropriate for the Court to re-
write a contractual provision negotiated by sophisticated parties with “significant experience and
success in the apparel industry.” Compl. ¶ 10. Given the express declaration that NexCen may
act with impunity and without liability, the complaint does not plead a plausible claim for breach
of contract. Count I of the complaint, therefore, is dismissed for failure to state a claim on which
relief may be granted.
The second provision that supports dismissal is an integration clause in the Investment
Agreement that neutralizes any claims that are based on prior understandings or representations.
Section 6.05 of the Investment Agreement provides that the documents executed in connection
with the acquisition “embody the complete agreement among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the parties … .”
Nam Cert. Ex. 2 at § 6.05. In light of this customary language that cuts off rights based on prior
communications, the complaint does not state plausible claims for relief based on earlier
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understandings of DEHC or representations that may have been made by NexCen. Whatever
circumstances may have caused DEHC to invest in the venture as a minority partner have
merged into the definitive documents relating to the acquisition and will not support a cause of
action for misrepresentation and concealment. Accordingly, Count II of the complaint is
dismissed for failure to state a claim on which relief may be granted.
The remaining counts of the complaint for breach of the duty of good faith and fair
dealing and for negligent misrepresentation also are not viable causes of action as stated in the
complaint.
Under Delaware law,5 “obligations under the covenant of good faith and fair dealing
should be implied only in rare instances.” Homan v. Turoczy 2005 Del. Ch. LEXIS 121 at *63
(citations omitted). Indeed, Delaware courts decline to allow parties to claim breach of the
implied covenant “as a license for the judicial crafting of contractual protections that could have
been, but were not, extracted at the bargaining table.” Id. at *62 (citations omitted). 	“[C]ourts
should not imply alleged obligation where the contract addresses the subject of the alleged
wrong, but fails to include the obligation alleged.” Id. at *63 (citation omitted).
Here, the “no liability” language of section 8.7 unambiguously excuses NexCen from
liability for failure to consult with DEHC or provide notice to DEHC in connection with a sale of
the business. In addition, the merger terms set forth in section 6.05 of the Investment Agreement
confirm that the parties did not have any unwritten expectations with respect to section 8.7.
DEHC cannot rely on the implied covenant of good faith and fair dealing to circumvent the
5 There is no dispute among the parties that Counts I and III (breach of contract and breach of the covenant of good
faith and fair dealing) are to be determined under Delaware law and Counts II and IV (misrepresentation and
concealment and negligent misrepresentation) are to be determined under New York law.
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express provisions of two separate agreements that it negotiated and executed. Therefore, Count
III of the complaint is dismissed for failure to state a claim on which relief may be granted.
To state a cause of action for negligent misrepresentation under New York law, a plaintiff
must establish (i) that the defendant had a duty to use reasonable care to impart correct
information because of some special relationship between the parties, (ii) that the information
was incorrect or false, and (iii) that the plaintiff reasonably relied upon the information provided.
Grammer v. Turits 706 N.Y.S.2d 453, 455 (2d Dep’t. 2000). The Court does not need to look
further than the “reasonable reliance” language set forth in Grammer to conclude that Count IV
of the complaint fails to state a claim on which relief may be granted. Section 6.05 of the
Investment Agreement bars claims for relief based on any oral statements that may have been
made by NexCen. Count IV of the complaint is specifically based on NexCen’s alleged
“superior knowledge and access to Resource Club to conduct due diligence in connection with
the purchase and acquisition of the Bill Blass licensing business.” Compl. ¶ 57. Whatever may
have been said (short of actual fraud) to induce the original investment has merged into the
definitive documents. DEHC, therefore, is unable to show that it reasonably relied on anything
other than what is set forth in the parties’ agreements, and Count IV of the complaint is
dismissed for failure to state a claim on which relief may be granted.
In its Memorandum of Law in Opposition to Motion of NexCen Brands, Inc. to Dismiss
the Complaint, the chapter 7 trustee of DEHC requests permission “to amend the complaint to
address any genuine pleading deficiencies as may be necessary.” Br. Opp’n at 25. Counsel to
the trustee renewed this request at oral argument. Federal Rule of Civil Procedure 15(a) provides
that “a party may amend the party’s pleading … by leave of court … [which] leave shall be
freely given when justice so requires.” The Second Circuit “strongly favors liberal grant of an
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opportunity to replead after dismissal of a complaint under Rule 12(b)(6).” Porat v. Lincoln
Towers Cmty. Ass’n 464 F. 3d 274, 276 (2d Cir. 2006). Moreover, “where a plaintiff clearly has
expressed a desire to amend, a lack of a formal motion” to amend is “not a sufficient ground …
to dismiss without leave to amend.” Id. (citation omitted). For these reasons, the Court is
allowing DEHC to amend its complaint.6
For the reasons stated, the Motion is granted with leave to file an amended complaint
within thirty days from the date of this memorandum decision. NexCen is directed to submit an
order consistent with this decision.
IT IS SO ORDERED.
Dated: 	New York, New York
November 9, 2011
s/ James M. Peck
Honorable James M. Peck
United States Bankruptcy Judge
6 In granting leave to amend, the Court does not mean to imply that the infirmities in the complaint may be corrected
by amendment.
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