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Bank of America, N.A., Individually and As Assignee of Certain v. James A. Knight

June 20, 2012

BANK OF AMERICA, N.A., INDIVIDUALLY AND AS ASSIGNEE OF CERTAIN CLAIMS, PLAINTIFF,
v.
JAMES A. KNIGHT, CYNTHIA KNIGHT, DEFOREST DAVIS, PAUL FLASK, MARIE O'BARR, BARRY BRUBAKER, PETER WILLMOTT, ROBERT WASIELEWSKI, LISA ROGERS, OLNEY PARTNERS LP, KNIGHT QUARTZ FLOORING - GLOBAL LLC, QUARTZ FLOORING NORTH AMERICA, LLC, FGMK, LLC, FROST RUTTENBERG & ROTHBLATT, P.C., DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

In an 87 page, 311 paragraph second amended complaint, plaintiff Bank of America, N.A. has sued defendants James A. Knight, Deforest Davis, Paul Flask, Marie O'Barr, Cynthia Knight, Olney LP, Knight Quartz Flooring - Global LLC, Quartz Flooring Norther America, LLC, Robert Wasielewski, Lisa Rogers (the "Knight defendants"), Barry Brubaker, Peter Willmott, FGMK LLC, and Frost, Ruttenberg & Rothblatt, P.C. ("FR&R," and together with FGMK the "auditor defendants"), alleging that certain directors, officers and controlling members of Knight Industries, LLC, Knight Quartz Flooring and Knight-Celotex LLC were abusing their position of authority and control to loot what the complaint identifies as the "Knight Entities*fn1 " by paying benefits to themselves and diverting assets and opportunities for the Knight Entities, which were indebted to plaintiff, into other companies owned and/or controlled by the Knight defendants. In sum, plaintiff alleges that the Knight defendants and Brubaker and Willmott unlawfully drained the Knight Entities of their assets and value, leaving nothing for plaintiff to collect on its $35 million loan to the Knight Entities.

Counts I and II of the second amended complaint ("complaint") allege professional negligence and aiding and abetting breaches of fiduciary duties against the auditor defendants. Count III alleges breach of fiduciary duty of loyalty and good faith against defendants James Knight ("James"), Cynthia Knight, Wasielewski, Rogers, Davis, Flask, O'Barr, and Brubaker and Willmott. Count IV alleges breach of fiduciary duty of care, loyalty and good faith against defendants James, Wasielewski and Rogers. Count V alleges conversion against James, Cynthia Knight, Davis, Flask, O'Barr, Brubaker, Willmott, Wasielewski, Rogers, Olney, KQF - Global and Quartz Flooring North America, LLC ("QFNA"), and Count VI alleges unjust enrichment against James and Cynthia, Davis, Flask, O'Barr, Wasielewski and Rogers. Count VII is brought against James, Cynthia, Davis, Flask, Brubaker and Willmott for usurpation of corporate opportunities. Count VIII alleges veil piercing and alter ego liability against defendants KQF -Global, Olney and QFNA.

Defendants have filed three separate motions to dismiss. The auditor defendants have moved to dismiss the counts brought against them (I and II) for failure to state a claim. The Knight defendants have moved to dismiss all counts against them (III - VIII) pursuant to Fed. R. Civ. P. 12(b)(1), 12(b)(6), 8(a) and 9(b), arguing that plaintiff lacks standing to bring the fiduciary duty claims, the claims are not pled with sufficient particularity yet do not contain a short and plain statement of the claims, and fail to state a claim. Brubaker and Willmott have separately moved to dismiss the counts brought against them (III, V and VII). For the reasons that follow, all motions to dismiss are granted.

FACTS*fn2

Despite the unnecessarily prolix nature of the complaint, the court will endeavor to summarize the relevant factual allegations.*fn3

The Parties

Plaintiff Bank of America is a national banking association and successor by merger to LaSalle Bank National Association.

Knight Industries, LLC ("Knight Industries") was a holding company that owned substantial equity interest in Knight-Celotex LLC ("Knight-Celotex") and Knight Quartz Flooring, LLC ("KQF"). Knight Industries was the only manager of both entities as well as numerous other related entities. Knight-Celotex was the operating subsidiary of Knight Industries that manufactured and distributed fiberboard products for roofing systems. The Knight Entities manufactured various products for use in the construction industries. KQF produced quartz flooring products for use in various construction settings.

James was the principal owner of Knight Industries and, according to the complaint, served as the Chief Executive Officer, Manager and Chairman of the Board for the Knight Entities and KQF. The complaint alleges that James, either individually or through the Wauregan Company, Inc., which he wholly owned and controlled, received payments and transfers from Knight Industries, Knight-Celotex and KQF in excess of $2.5 million for inadequate value, a substantial portion of which was transferred while Knight Industries was insolvent.

Cynthia Knight is James' wife and General Partner of defendant Olney, which served as manager of KQF-Global. Cynthia is also alleged to have served on the Board of the Knight Entities and the KQF Board.

Defendant Davis owed a 17% membership interest in KQF and a 20% membership interest in KQF-Global, served on the Boards of the Knight Entities and KQF as well as several other entities. The complaint alleges that he received payments and transfers from Knight Industries, Knight-Celotex and KQF of more than $200,000 for inadequate value, a portion of which was transferred while the companies were insolvent.

Defendant Flask owned a 4% membership interest in KQF and KQF-Global. He served on the Boards of the Knight Entities and KQF as well as several Knight Entities including defendant QFNA, for which he was a founding member. The complaint alleges that he received over $138,000 from Knight Industries and Knight-Celotex for no or inadequate value while those companies were insolvent.

Defendant O'Barr was a founding investor of Knight Industries, served as its initial Chief Financial Officer and was a member of the Knight Entities Board. She allegedly received payments of over $700,000 for no or inadequate value while Knight Industries was insolvent.

Defendants Brubaker and Willmott were owners of membership interests in KQF and served on the KQF Board and the boards of several other entities. Both were founding members of QFNA.

Defendant Wasielewski served as Senior Vice-President and Chief Financial Officer of the Knight Entities and KQF and was "touted as Chief Financial Officer of Knight Industries' worldwide operations." He held membership interests in KQF and Knight-Celotex.

Defendant Rogers was a member of the senior management teams of the Knight Entities and KQF, serving as Vice-President of Shared Services, head of Human Resources and various other senior positions. She exercised control over the accounting personnel for the Knight Entities and KQF and held membership interests in KQF and Knight-Celotex.

KQF Global is a Delaware corporation comprised of Knight Industries, Olney, Davis, and Frederick W. Mowinkel. KQF Global served as the manager of KQF. KQF Global also served as Manager and held at least a 43% interest in KQF China.

Defendant Quartz Flooring North America, LLC ("QFNA") is a Delaware limited liability company formed on or about May 6, 2009. Its founding members were Cynthia, Davis, Brubaker, Willmott and Flask. Currently defendant Davis serves as Manager and defendant Flask serves as President of QFNA.

Defendants FGMK and Frost, Ruttenberg & Rothblatt ("FR&R") are CPA firms located in Illinois.

BACKGROUND

Plaintiff, through its predecessor LaSalle Bank National Association, started a lending relationship with the Knight Entities in September 2003. By December 31, 2005, plaintiff's outstanding loan to the Knight Entities totaled approximately $32.5 million. On February 14, 2006, plaintiff increased the credit facility to the Knight Entities (the "KE loans") to $43 million pursuant to a certain Amended and Restated Loan and Security Agreement (the "KE Loan Agreement"). The loans were increased by $1 million on January 31, 2007, and again on September 25, 2007.

Plaintiff also provided to KQF $1.3 million in secured financing (the "KQF loan") pursuant to a Loan and Security Agreement dated February 14, 2006 (the "KQF Loan Agreement"). The obligations and liabilities of KQF to plaintiff under the KQF Loan Agreement are secured by a first priority security interest in all of KQF's property "of any kind or description, tangible or intangible, wherever so located and whether now existing or hereafter arising or acquired." Specifically, plaintiff held a security interest in any and all accounts, inventory, equipment, general intangibles, commercial tort claims, instruments, software and computer programs, investment property and all other property including KQF's intellectual property acquired from its acquisition of Rikett Technology AS.

The Knight Entities' obligations and liabilities under the KE Loan Agreement was secured by a first priority security interest in all of the Knight Entities' accounts, inventory, equipment, investment property, the Knight-Celotex plants, and all other property (the "collateral").

The KE Loan Agreement required the Knight Entities to provide plaintiff with periodic financial statements, maintain a standard and modern accounting system in accordance with generally accepted accounting practices ("GAAP"), and that all annual, monthly or other financial statements be prepared in accordance with GAAP. Specifically, the Knight Entities agreed to provide plaintiff with, (1) annual audited consolidated financial statements of the Knight Entities and subsidiaries, and (2) monthly borrowing base certificates showing the accounts receivables and finished goods inventory, monthly aged account receivable schedules and inventory reports, and computations. Plaintiff alleges that the accuracy of these reports was critical because plaintiff made advances to the Knight Entities and KQF on a monthly basis based on reported accounts receivable and inventory balances. According to plaintiff it was for this reason that the KE Loan Agreement required the Knight Entities to retain independent reputable auditors to review and audit their financial statements.

On September 30, 2008, the KE loan matured and the Knight Entities defaulted by failing to pay the indebtedness due, totaling in excess of $34 million. According to the complaint, in the weeks leading up to the default and in the months following, plaintiff and the Knight Entities discussed and negotiated a potential resolution of the default. By March 2009 it was apparent that all attempts had failed and plaintiff notified the Knight Entities that it intended to exercise its rights under the Loan Agreement including its rights to foreclose on the collateral.

According to plaintiff, while negotiating with plaintiff to cure the loan defaults, the defendants were simultaneously orchestrating a plan to divest the Knight Entities of any remaining assets. In February 2009 James caused Knight Industries to resign as Manager of KQF, effectively relinquishing control of KQF just prior to Knight Industries filing for bankruptcy. This was done to deprive Knight Industries of its voting interest in KQF, which would allow the individual defendants the ability to complete the conversion of assets from KQF to QFNA unencumbered by bankruptcy rules and protections that would govern Knight Industries after it filed for bankruptcy. On February 8, 2009, by written consent, the KQF Board including James, Cynthia, Flask and Davis, who were all also serving as Knight Entities Board members, accepted Knight Industries' resignation and elected KQF-Global as KQF's Manager. KQF-Global was managed by defendant Olney, with Cynthia as its General Partner. In the same written consent, the Knight Entities board members serving on the KQF Board unanimously approved the conversion of $4,273,360 in loans made by Knight Industries to KQF from debt obligations to non-voting equity interests in KQF. As a result, the same defendants remained in control of KQF, but they were no longer linked to the Knight Entities or Knight Entities' creditors. The move also deprived any subsequent receiver or trustee of Knight Industries from any management control over KQF, and allowed Olney and KQF Global to benefit as interest holders from the alleged improper transfers.

On April 6, 2009, Knight Industries and Knight-Celotex filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Between April and May 2009 the bankruptcy court entered cash collateral orders which contain certain restrictions on Knight Industries' use of cash. On June 11, 2009, the bankruptcy court granted plaintiff's motion to convert ...


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