United States: Summary Judgment Granted in Favor of New Matco Defendants in NewStarcom Holdings Bankruptcy

Last Updated: March 14 2016
Article by Carl D. Neff

In the NewStarcom Holdings bankruptcy matter, Miller v. American Capital Ltd., et al. (In re NewStarcom Holdings, Inc., et al.), Adv. Pro. 10-50063 (CSS) (Bankr. D. Del. March 8, 2016), the Delaware Bankruptcy Court ruled upon various motions, including a motion for summary judgment filed by defendants.  The Chapter 7 Trustee filed an adversary action alleging, among other things, that Matco Electric Corporation ("New Matco"), Ronald Barber, Mark Freije  and Kenneth Elliot (the founders and owners of New Matco) breached their fiduciary duties to the Debtors or knowingly assisted the ACAS Defendants (American Capital, Ltd and its current or former employees) in breaching their own duties to the Debtors.

Factual Background

In 2003, ACAS acquired an 80% stake in NewStarcom Holdings, Inc. ("NHI"), the lead debtor.  ACAS's ownership of NewStarcom was, in part, the result of a leveraged buyout.  As a result, NHI and its subsidiaries were jointly and severally liable for a revolving $10 million credit agreement with Citizens Bank ("Citizens").  However, Port City began hemorrhaging  cash, and in October 2007, the Director Defendants advised that NewStarcom was insolvent, and began defaulting on loan obligations.

Ultimately, a brief sales process occurred, whereby NewStarcom was sold to New Matco and Barber for $2 million.  Citizens oversaw the sales process and was content with the deal for several reasons, including the fact that Barber did not have a non-compete and could have simply re-started the company across the street without buying the assets.

Procedural History

In November 2011, the Trustee filed his Amended Complaint against the ACAS Defendants and the New Matco Defendants. In February of 2012, the Defendants moved for dismissal and, on May 24, 2012, the Court heard oral arguments on the motions to dismiss. After consideration, the Court granted the motion to dismiss, in part, and issued an order dismissing claims 4-8 of the Trustee's Amended Complaint.  In 2014, the Court issued a written opinion limiting the Trustee's discovery requests, on the grounds that New Matco's post-sale financial performance was of minimal relevance to determining if the Defendants breached their fiduciary duties leading up to and during the sale of Old Matco.


The New Matco Defendants advanced three substantive legal arguments in support of summary judgment: (1) any fiduciary duties they owed to the Debtors were extremely narrow in scope, (2) the "breaches" alleged by the Trustee did not fall within those narrow duties and (3) they did not "aid and abet" any breaches of fiduciary duties by the ACAS Defendants. The New Matco Defendants also argued that the Trustee has failed to point to any evidence in support of several necessary elements of his claims and, therefore, the Court granted summary judgment on those claims.

Judge Sontchi found that the Trustee wholly failed to provide evidence to support his allegations against New Matco Defendants or to rebut the defenses raised by them, instead relying upon vague allegations and conclusory statements unsupported by the record.

Notably, the Court found that the only fiduciary duties owed by the New Matco Defendants to NewStarcom were as managers of an NSC subsidiary.  These duties do not include the duty to ensure their parent corporation receives the highest price possible when selling the subsidiary. As managers, their duty was to maximize the value of Old Matco through faithful stewardship of the company.  The Court found that the record clearly shows they fulfilled this duty—it was the actions of NewStarcom and Citizens that put Old Matco at risk.

The Court also denied the Trustee's motion for reconsideration of the Court's order dismissing the Trustee's claim that alleged that the sale of Old Matco to the New Matco Defendants was an avoidable transfer under both Delaware law and the Bankruptcy Code.  As stated by the Court, "[t]he Trustee has failed to show new evidence warrants reconsideration and the interests of justice, far from requiring reconsideration, weigh heavily against. The Trustee's failure to properly and timely assert this fraudulent transfer claim is entirely result of his own doing."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Carl D. Neff
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