Infinity Investors Ltd. v. Kingsborough (In re Yes! Entm't Corp.)

Infinity Investors Ltd. v. Kingsborough (In re Yes! Entm't Corp.)

Opinion

 [*142] MEMORANDUM OPINION

October 14, 2004

Wilmington, Delaware

Farnan, District Judge.

Presently before the Court is an appeal by Infinity Investors Limited for and on behalf of the Estate of Yes! Entertainment ("Infinity") from the June 22, 2002 Order (the "Order") of the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"): (a) granting the Motions to Dismiss of Defendants (i) Esmond Goei and Michael Marocco; (ii) Dave Costine and Gary Nemetz; and (iii) Sharon Duncan and Tom Fritz; (b) denying the Motion for Order Substituting Trustee Executive Sounding Board Associates Inc. as Plaintiff; and (c) dismissing the Adversary Proceeding as to all Defendants. Infinity has settled this dispute with all Defendants except Defendant Donald Kingsborough.  [**2]  For the reasons discussed, the Court will reverse the June 22, 2002 Order of the Bankruptcy Court as it applies to Defendant Kingsborough and remand this matter for further proceedings consistent with this decision.

I. BACKGROUND

At the commencement of its Chapter 11 case, the Debtor Yes! Entertainment Corporation obtained debtor-in-possession ("DIP") financing from Infinity. The Debtor eventually stopped operating, and Infinity gave notice to the Debtor that it would be terminating DIP financing and that all amounts due and owing Infinity under the DIP credit agreement were immediately due and payable. Infinity also notified the Debtor and other relevant parties that it would take possession of the post-petition collateral.

Nearly a year after being appointed, the Chapter 11 Trustee filed various avoidance actions on behalf of the Debtor's estate to preserve causes of action of the estate through confirmation of a plan of reorganization. However, the Chapter 11 Trustee declined to file a complaint against Defendant Kingsborough and others (the "Kingsborough Complaint"), because he concluded that he did not have knowledge of the relevant facts to support such claims. Because [**3]  Infinity was familiar with the factual background, it filed the Kingsborough  [*143]  Complaint, which included avoidance claims as well as state law claims for breach of fiduciary duty and fraudulent conveyances, which were part of Infinity's collateral.

Before Infinity's adversary proceeding could proceed, the Debtor filed its Reorganization Plan (the "Plan") which was approved by the Bankruptcy Court. The Plan provided for a liquidating trust (the "Trust"), which would have the exclusive authority to prosecute, settle or compromise any causes of action, including without limitation, the Kingsborough Complaint, for the benefit of creditors. Pursuant to the terms of the Plan which became effective in April 2002, Executive Sounding Board Associates, Inc. ("ESBA" or the "Trustee") was selected to serve as the Trustee of the Trust.

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