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Court Rejects Business Judgment Rule Defense to Breach of Fiduciary Duty Claim


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September 19, 2022, US Bankruptcy Court for Western Pennsylvania – The Court denies in part and grants in part the motion filed by Peter Tsudis (the “Defendant”) to dismiss the complaint brought by KIND Operations, Inc. (the “KIND”), as assignee of the bankruptcy estate of PA Co-Man, Inc. (the “Debtor”). KIND alleges “breach of fiduciary duty”, “fraudulent concealment,” and “fraudulent transfer” against Mr. Tsudis.

The allegations arose out of a private foreclosure sale of substantially all of the Debtor’s assets before Debtor’s bankruptcy filing. KIND’s complaint alleges that the Debtor’s pre-petition lender and Mr. Tsudis (Debtor’s CEO) allegedly “manufactured” a private foreclosure sale allegedly without “adequate marketing” or “competitive bidding.” KIND alleges that the Debtor’s assets were allegedly sold “well below fair market value”. 

KIND further claims that Mr. Tsudis allegedly breached his fiduciary duty as Debtor’s CEO when he allegedly steered the private sale to AOG, LLC (a private vehicle of AUA Private Equity Partners, LLC). Mr. Tsudis contended that the “business judgment rule” insulated Mr. Tsudis’ management decisions from being subject to attack. However, the Court held that a plaintiff could overcome the “business judgment rule” at the pleading stage by alleging self-dealing and lack of disinterestedness on the part of the fiduciary-defendant. The Court found that the allegations made by KIND were sufficient for a breach of fiduciary duty claim to survive Defendant’s motion to dismiss.

KIND alleges that Mr. Tsudis did not advise the creditors of the contemplated sale of assets. The Court held that the alleged absence of such advice allegedly caused direct “personal” harm to the particular creditors and thus the fraudulent concealment cause of action will not be a property of the estate. Since KIND is an assignee of the bankruptcy estate, the Court held that KIND lacked standing to bring personal actions on behalf of some creditors. The Court allowed Mr. Tsudis’ motion to dismiss the fraudulent concealment claim.  

KIND Operations, Inc. v. Cadence Bank, N.A. (In re PA Co-Man, Inc.), 2022 Bankr. LEXIS 2555,B.R., 2022 WL 4298188