In re Teleservices Group, Inc.

Full title: In re TELESERVICES GROUP, INC., Chapter 7 Debtor. BARRY W. FROST, TRUSTEE…

Court: United States Bankruptcy Court, D. New Jersey

Date published: Jan 15, 2009

Case No.: 03-17230 (MBK), Adv. Pro. No.: 03-2678 (MBK) (Bankr. D.N.J. Jan. 15, 2009)

Opinion

Case No.: 03-17230 (MBK), Adv. Pro. No.: 03-2678 (MBK).

January 15, 2009

APPEARANCES: Joseph T. Adragna, Esq. Huntington, New York Attorney for Plaintiff, Barry W. Frost, Trustee.

Gregory R. Haworth, Esq. Duane Morris, LLP Newark, New Jersey Attorneys for Defendants, John X. Adiletta, the Estate of Eugene Collins, and Paul Patrizio.

OPINION

MICHAEL KAPLAN, Bankruptcy JudgePage 2

I. INTRODUCTION

This matter comes before the Court on the complaint filed by Plaintiff, Barry W. Frost, Chapter 7 Trustee ("the Trustee") for Teleservices Group, Inc. against Defendants John X. Adiletta, the Estate of Eugene Collins, and Paul Patrizio (collectively and interchangeably, "Defendants" or "TSG Directors").¹ The individual Defendants are the founders and directors of Teleservices Group, Inc. ("TSG"). TSG filed a voluntary petition under Chapter 7 of the Bankruptcy Code on March 6, 2003, and thereafter, Barry W. Frost was appointed the Chapter 7 trustee.

1 The Trustee's original complaint listed as Defendants John X. Adiletta, Jane Doe, Executor Estate of Eugene Collins, Paul Patrizio, and John Pron. As the adversary proceeding advanced, the Trustee amended his complaint limiting the individual Defendants to those stated above. Furthermore, Mr. Collins died prior to the commencement of this action.

As set forth below, the Trustee's adversary complaint stems from the alleged misconduct, negligence, and breach of fiduciary duties by Defendants, with respect to various management decisions undertaken by Defendants from the inception of TSG's operations, through the eventual bankruptcy filing. Subsequent to filing the complaint, the Trustee moved to amend the complaint to both add and remove particular causes of action. The Court, at oral argument and related conferences, streamlined the counts of the complaint and amended complaint. The complaint and amended complaint, as permitted by the Court, include the following causes of action:

• Count I: The TSG Directors breached their duty of care owing to TSG by

Incorporating TSG in the first place without equity;

Purchasing Tel@net Information Systems Corp. ("Tel@net") and Northeastern Communications, Inc. ("NCI");

Failing to comply with the TSG Business Plan;

Failing to conduct a meeting of the board of directors when deciding to (i) assume Tel@net's liabilities to NEC, (ii) execute the Reinstatement Agreement and Confession of Judgment, and (iii) purchase Property Technologies, Ltd. through OneNet;

Neglecting to place Tel@net and/or TSG into Chapter 11 bankruptcy; and

Failing to use care with respect to TSG's finances and its accounting system and concentration account.

• Count II: The TSG Directors breached their duty of loyalty owing to TSG by

Owning TSG stock without paying money, which in turn provided Defendants with a material financial interest that conflicted with Defendants' fiduciary duties; and

Disregarding the investors of TSG, the shareholders, and the creditors of TSG and its subsidiaries.

• Count III: The TSG Directors breached their duty of good faith owing to TSG by using a flawed system of accounting and failing to pay TSG's creditors.

• Count IV: The TSG Directors engaged in willful, wanton, and grossly negligent conduct, thereby entitling the Trustee to recover punitive damages.

• Count VI: The TSG Directors converted and/or misappropriated gross revenues of the subsidiary corporations by depositing funds into TSG's concentration account and paying their salaries therefrom.

• Count IX: The TSG Directors breached their duty of loyalty owing to TSG by engaging in self-dealing through

Payment to Collins and Associates sums in excess of $110,000;

Payment to Apogee Partners, Inc. ("Apogee Partners") sums in excess of $200,000;

Withdrawal of corporate funds from TSG without explanation;

Use of corporate funds to pay for golf-club memberships; and

Payment of their salaries without expending sufficient time to TSG's business.

The Trustee seeks to recover over $40 million in compensatory and punitive damages. Defendants adamantly object to all counts of the Trustee's complaint.

Each party filed separate motions for summary judgment, contending, of course, that there were no existing material issues of fact. At the Court's suggestion after oral argument, in lieu of ruling on these motions and possibly engaging in a lengthy and costly trial, the parties stipulated to the evidentiary record placed before the Court in support of their respective competing motions, and consented to trial on the existing paper record.² The parties were permitted to supplement the record by means of simultaneous filings of post-hearing submissions in which each party addressed alleged inconsistencies in their respective recitation of facts. In this regard, in addition to the briefs and certifications and exhibits submitted by each party in support of and in opposition to the summary judgment motions, the Court has reviewed and considered (but not necessarily relied upon) the following: (1) Certification of Joseph T. Adragna, Esq. Concerning Representations Made an [sic] Oral Argument before the Court on September 11, 2008; (2) Defendants' Response to the Trustee's Assertions Made at Oral Argument on September 11, 2008; (3) Trustee's Letters and Exhibits in Response to the Court's Letter of December 2, 2008 (dated December 7, 2008); and (4) Defendants' Letter Response to the Court's Letter of December 2, 2008 (dated December 10, 2008).

2 While the Court cannot identify specific, direct authority permitting to try this matter based on the paper record, which includes extensive volumes of testimony, evidence, and affidavits, the Court notes that authority exists indirectly based on the surrounding "penumbra" and agglomeration of the following provisions: Fed R. Civ. P. 43(a); Fed.R.Evid. 102, 103(a), 403, 611; and 11 U.S.C. § 105(a). Additionally, the parties have given the Court their full consent.

For the reasons set forth hereinafter, the Court grants partial summary judgment in favor of Defendants, dismissing Counts 1, 2, 3, 4, and 6 of the amended complaint. The Court further grants the Trustee's motion for summary judgment on Count 9, alleging breach of fiduciary duty by Defendants, and awards damages in the amount of $270,000 representing the sums paid by TSG to Apogee Partners subsequent to the initial raise.

II. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(O).³ Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).

3 Neither party, in their respective pleadings, indicated whether the claims at issue are "core" or "non-core." While the Court nevertheless determines that the claims fall within 28 U.S.C. § 157(b)(2)(O), to the extent such claims are "non-core," the parties have consented to this Court hearing and determining the matter.

III. FINDINGS OF FACTS⁴

4 To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.

The following constitutes the Court's findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052:

TSG's Incorporation, Directors, and Business Plan

1. Debtor, TSG, is a New Jersey corporation incorporated in May, 2000 by Defendants John X. Adiletta ("Adiletta"), Eugene Collins ("Collins"), and Paul Patrizio ("Patrizio"). Defendants were elected as directors of TSG.⁵ Trustee's Motion to Amend Complaint ("Trustee's Complaint"), Exhibit 3

5 Mr. Kevin Fitzgerald was also a director of TSG. Mr. Fitzgerald resigned in early 2002 and is not a defendant in this matter. Adiletta State Tr., 10:6.

2. TSG was formed as a holding company for the purposes of acquiring and consolidating small and medium-sized telecommunications interconnect companies. On May 2, 2000, TSG published its Business Plan, which outlined TSG's strategy to acquire and consolidate telecommunications interconnect companies. TSG intended to be an "industry consolidator" by running the acquired interconnect companies as a "unified entity" and "to spread out the overhead." Trustee's Complaint, Exhibit 4 (the "Business Plan"); Bankruptcy Court Deposition of John Pron, 11:5-6.

3. The Business Plan specifically identified two initial "core companies": Tel@net Information Systems Corp. ("Tel@net") and Northeastern Communications, Inc. ("NCI"). With Tel@net and NCI acquired, the Business Plan expected TSG to "launch additional acquisitions and tuck-ins." Id.

4. Additionally, the Business Plan identified TSG's officers and directors and their respective salaries, including an additional closing fee of $100,000 to Apogee Partners, Inc. (discussed further below). Id. at 17.

Implementing TSG's Business Plan, its Initial Capital Raise, and Apogee Partners

5. TSG, being only a holding company with no assets, issued in May, 2000 its Subscription Offering to raise capital and implement its Business Plan. Certification of John Adiletta ("Adiletta Cert."), Exhibit C (the "Subscription Offering").

6. The Subscription Offering proposed selling, at the price of $100,000 per Unit, forty-five Units on an "all-or-none" basis, and detailed TSG's intended use of incoming proceeds, as follows:

Working Capital: $600,000.00

Cash to Acquisitions: $2,650,000.00 Advisory Fees: $675,000.00 Organizational Expenses: $575,000.00 Total: $4,500,000.00

Id.

7. TSG retained Apogee Partners, a corporation wholly owned by Patrizio, to facilitate its initial capital raise. Bankruptcy Court Deposition of Paul Patrizio ("Patrizio Tr."), 12:21-25.

8. Apogee Partners raised and deposited a combined amount of $3,023,000 into TSG's concentration account. Trustee's Complaint, 4-5; Patrizio Certification ("Patrizio Cert."), Exhibit A.

9. An additional (non-Apogee Partners) deposit of $300,077.04 was transferred into TSG's concentration account. Patrizio Cert., Exhibit A.

10. In total, TSG raised only $3,323,077.04 of its intended "all or none" $4.5 million projection. TSG did not raise $4.5 million. Patrizio Cert., ¶ 6-8, Exhibit A.

11. Notwithstanding the failure to raise exactly $4.5 million, TSG implemented its Business Plan. In August, 2000, TSG purchased Tel@net and NCI, the "core companies," as stated in the Business Plan. Trustee's Complaint, 4; Adiletta Cert., Exhibits B, D, E, I.

12. TSG spent $2,560,000 of its capital raise purchasing both subsidiaries. This amount was less than the projected $2,650,000 cost, as stated in the Subscription Offering. Adiletta Cert., Exhibit B.

13. Seeing that TSG raised less than its projected capital raise, Adiletta, Collins, and Apogee Partners accepted their compensation in the form of TSG stock, as opposed to cash. Adiletta Cert, Exhibit D.

14. After purchasing Tel@net and NCI, paying fees and costs, and compensating Adiletta, Collins, and Apogee Partners by means of stock, TSG had a working capital of $564,831.00 — virtually the projected $600,000 amount of working capital as stated in the Subscription Offering. Id.

The "Core Companies": Tel@net and NCI

15. Tel@net is a NY corporation founded by Vito Marrone, Michael Iorio, and Robert Torres ("Tel@net Sellers").

16. Tel@net's audited balance sheets for 1998, 1999, and the first seven months of 2000 show that Tel@net was operating at a loss during those time periods. Adiletta Cert. Exhibit F.

17. In August, 2000, TSG acquired 100% of Tel@net's outstanding stock for $5,945,000. The Tel@net Sellers agreed to payment on a 3-part basis: 1/3 in cash ($1,945,000); (2) 1/3 in shares of TSG stock (950,000 shares); and 1/3 in promissory notes ($3,050,000). Adiletta Cert., Exhibit E, p. 1; ¶ 4.

18. Each promissory note, one for each Tel@net Seller, was secured by a pledge of Tel@net stock delivered to TSG pursuant to a Pledge Agreement. The Pledge Agreement granted the Tel@net Sellers the right to have Tel@net stock returned to them upon default by TSG in its obligation to repay the promissory notes. Adiletta Cert., Exhibit G.

19. When the Tel@net Sellers agreed to sell Tel@net to TSG, TSG's Business Plan fully disclosed TSG's purposes for acquiring Tel@net, as well as the salaries for Defendants.⁶ Business Plan.

6 By way of the Pledge Agreement, the Tel@net Sellers accepted some risk that the TSG venture would be unsuccessful. The Tel@net Sellers agreed that their recourse in the event TSG defaulted in paying the promissory notes would be the option to reclaim the Tel@net stock. The Court mentions this for completeness, and again notes, however, that this adversary proceeding involves the alleged wrongful conduct directed against TSG, not against the Tel@net Sellers.

20. Concurrent with the purchase of Tel@net, TSG acquired NCI, the second "core company," for the purchase price of $1,800,000. NCI's sole shareholder, Joseph F. O'Donnell, agreed to payment on a similar 3-part basis: $600,000 in cash; 600,000 shares of TSG stock; and $600,000 in a promissory note. Adiletta Cert., Exhibit I, ¶ 4.

21. With both subsidiaries acquired, each Defendant was elected as a new director for both Tel@net and NCI. State Court Deposition of John Adiletta ("Adiletta State Tr."), p. 27-28.

22. The Defendants also served as officers to the subsidiaries; however, the Tel@net Sellers continued to run the business of Tel@net. Trustee's Motion for Summary Judgment ("Trustee's Motion"), FN 8.

Tel@net's and its Distributor, NEC

23. Before TSG acquired Tel@net, Tel@net had an operating dealership agreement with NECAM ("NEC"), a telecommunications equipment manufacturer. Adiletta Cert., Exhibit J ("Associate Agreement"), p. 27.

24. Pursuant to the Associate Agreement, Tel@net agreed to purchase and sell telecommunications products manufactured by NEC. In addition, NEC agreed to provide Tel@net with technical support services vis-à-vis NEC's equipment. Id., §§ 1, 24. The Associate Agreement required Tel@net to furnish payment within sixty days of each invoice sent by NEC. Id., § 4(a).

25. In exchange for NEC's extension of credit, Tel@net granted NEC a security interest in (i) Tel@net's entire inventory purchased from NEC; (ii) any and all proceeds derived from all NEC products (including, but not limited to, the related accounts); (iii) any contractual rights related to the sale or lease of any NEC products; and (iv) the list of all customers to whom Tel@net may have sold or leased NEC products or to whom Tel@net provided related services. Id., § 5(a). Upon default, Tel@net agreed to relinquish this collateral to NEC and to cooperate fully with NEC as it exercised its rights. Id., § 5(b), (d).

26. By the time TSG purchased Tel@net (approximately four months later), Tel@net was in technical default of the Associate Agreement, having not paid its NEC invoices within 90 days. Tel@net's debt to NEC was $1,248,985.99. It was in this financial state that TSG acquired Tel@net and its related obligations to NEC.⁷ Adiletta Cert., ¶ 18; Exhibit K.

7 The record reflects conflicting positions as to whether the actual amount of this debt was known to TSG at the time of purchase. The Court deems this irrelevant, for subsequent to closing, the actual amount of indebtedness certainly became known to TSG. Defendant's Motion, Adiletta Cert., ¶ 18.

27. NEC made its concerns known regarding the Tel@net debt, and during the months following Tel@net's acquisition, negotiations commenced between NEC and TSG to resolve the situation. Adiletta Cert., ¶ 19.

28. In January, 2001, as a result of these negotiations, TSG assumed Tel@net's debt by way of a promissory note to NEC. Adiletta Cert., Exhibit L ("Promissory Note"). The Promissory Note was signed for $910,531.41, which represented Tel@net's debt stemming as far back as 1999 and current as of November, 2000. Trustee's Motion for Summary Judgment, Exhibit C.

Tel@net Defaults on the Associate Agreement

29. Between August, 2000 (when TSG acquired Tel@net) and August, 2001, TSG, acting on behalf of Tel@net, purchased from NEC approximately $2 million worth of additional telecommunications equipment. Adiletta Cert., ¶ 21.

30. TSG issued payments to NEC with respect to these subsequent purchases, but made no progress in reducing the prior outstanding balance due to NEC. Id.

31. By the end of July, 2001, Tel@net's balance due to NEC approximated $1,268,000. Tel@net, therefore, once again was in default. Id. NEC terminated its Associate Agreement with Tel@net and exercised all its rights thereafter. Adiletta Cert., Exhibit M.

32. TSG could not repay the balance and responded by initiating additional negotiations with NEC. TSG did not want to cease its business with NEC, for otherwise Tel@net's customers might lose the technical support services provided by NEC. An agreement was reached memorialized by the Reinstatement Agreement. Adiletta Cert., Exhibit N ("Reinstatement Agreement").

33. The Reinstatement Agreement was dated August 20, 2001. Essentially, the Reinstatement Agreement conditionally reestablished the Associate Agreement as described above: In exchange for extension of credit, NEC was granted a broad security interest in Tel@net's assets and inventory; TSG, on behalf of Tel@net signed a promissory note in the amount of $1,347,250; and TSG signed a guarantee insuring payment of the Tel@net debt to NEC. NEC expected Tel@net to remit payment in full by December 31, 2001, some three months from the execution of the agreement. Adiletta Cert., Exhibit N.

34. Tel@net's profitability had been increasing at this time. This fact, and the chance of obtaining future loans or a sizable capital infusion, warranted the TSG Directors to believe that such an amount could be paid in this amount of time. Trustee's Motion, p. 7-8, Exhibit E.

35. TSG, however, did not make the payment. On December 31, 2001, Tel@net, at the hands of TSG, defaulted on the promissory note due to NEC. Patrizio Tr., 106:19-22.

TSG Acquires Property Technologies

36. At the same time Tel@net and TSG were negotiating with NEC, TSG continued its attempt to realize "administrative and operational synergies" in the telecommunications industry pursuant to the Business Plan and Company Overview. Adiletta Cert., Exhibit A, Exhibit B, ¶ 27.

37. TSG considered acquiring Property Technologies, Ltd., a Virginia telecommunication company then currently in Chapter 11 bankruptcy. Trustee's Motion, Exhibit G. The assets of Property Technologies, subject to a secured interest held by Wachovia Bank, were being offered for sale by the Chapter 11 Bankruptcy Trustee. Adiletta Cert., ¶ 29. Trustee's Motion, Exhibit G.

38. The TSG Directors believed that purchasing Properties Technologies provided strategic business benefits to TSG and was in its best interest. Adiletta Cert., ¶ 35.

39. To implement this purchase, TSG formed OneNet, Inc. ("OneNet"), a wholly owned holding subsidiary of TSG. Trustee's Motion, Exhibit F, FN 10.

40. OneNet raised $600,000 by way of a loan from Greg Brady and Edwin Fitzgibbon ("Brady/Fitzgibbon Loan"). The loan terms provided that $300,000 be used as payment against the NEC debt, with the remaining $300,000 applied towards purchasing Property Technologies. OneNet was required to pay 36% annual interest on the Brady/Fitzgibbon loan. Trustee's December 12th Response, Exhibit C, D.

41. TSG issued an Unlimited Guarantee of payment to secure the loan. Further, each individual Defendant personally guaranteed the $600,000 loan ($200,000 by each Defendant). Id. TSG was able to raise the funds only because each Defendant personally guaranteed the loan. Adiletta Cert., Exhibit P.

42. On March 5, 2002, OneNet closed on its purchase of Property Technologies in the amount of $3,100,000. Trustee's Motion, Exhibit J.

43. At closing, OneNet paid $1,200,000 in cash. This figure consisted of $300,000 from the Brady/Fitzgibbon Loan and $900,000 from cash held in Property Technologies bank accounts, as approved by the Virginia Bankruptcy Court. Trustee's Motion, Exhibit G.

44. At closing, TSG also guaranteed to OneNet obligations in the amounts of $1,500,000 and $370,000 to satisfy the purchase price of Property Technologies. Adiletta Cert., ¶ 33.

Tel@net Defaults on the NEC Reinstatement Agreement

45. On December 31, 2001, Tel@net defaulted on the Reinstatement Agreement and the accompanying promissory note due to NEC. Patrizio Tr., 106:19-22; see supra, fact 35.

46. On April 2, 2002, weeks after the Property Technologies closing, NEC exercised its rights under the Agreement, demanding payment from both Tel@net and TSG. Adiletta Cert., Exhibit V.

47. As was the case the prior year, the TSG Directors were again striving to keep its relationship with NEC intact. TSG had no bargaining leverage, however, and NEC was reluctant to refinance the Tel@net debt. NEC also requested information on the collateral held by Tel@net that secured the amounts owed to NEC. Adiletta Cert., Exhibits X, Z.

48. This time, in addition to their normal, informal directorial discussions, the TSG Directors consulted TSG's attorney, the law firm of Phillips Nizer. Phillips Nizer advised the Defendants that no defenses were available against NEC, and, therefore, TSG should continue all attempts to restructure the Tel@net debt and to reinstate the Associate Agreement. Adiletta Cert., ¶ 42. Phillips Nizer also advised the TSG Directors that bankruptcy was not an effective option for TSG. Id.

49. NEC ultimately agreed to restructure the debt with TSG. By way of a Second Restructuring Agreement, NEC required TSG to pay an initial $350,000 payment upon execution, with the remainder to be paid in full by July 31, 2002. Additionally, NEC required TSG to execute an Affidavit Confessing Judgment. The Second Restructuring Agreement was executed on May 2, 2002. Adiletta Cert., Exhibit DD.

50. To satisfy TSG's obligations, the TSG Directors anticipated further financing from private investors to pay NEC in full and to pay the installments due on the Property Technologies purchase. Discussions with one potential investor, Ash Gulamali, gave rise to an expectation of additional financing in excess of $5 million. This additional funding did not materialize, however, and on May 17, 2002, TSG defaulted on the Second Restructuring Agreement. Adiletta Cert., ¶ 49, Exhibits EE, FF.

51. Within one month from default, NEC obtained an Entry of Judgment against TSG and Tel@net; Tel@net surrendered NEC's collateral to NEC, and NEC successfully pursued its collection efforts against TSG. Adiletta Cert., ¶ 52.

52. Notwithstanding the Trustee's assertions, the record before the Court shows that at no time did Tel@net have the financial wherewithal to repay its longstanding debt to NEC. Pertinently, nothing in the record before the Court supports a finding that TSG had sufficient cash on hand to satisfy the NEC debt, while also paying both current expenses and its obligations to the Tel@net Sellers. Trustee's Letters and Exhibits in Response to the Court's Letter of December 2, 2008 (dated December 7, 2008).⁸

8 The Trustee's proffered evidence amounts to little more than a projection of gross profits, and does not demonstrate that TSG had sufficient cash on hand to satisfy the mentioned obligations.

53. TSG filed a voluntary petition for Chapter 7 Bankruptcy on March 6, 2003.⁹

9 The Court notes that prior to the TSG bankruptcy filing, the Tel@net Sellers did not attempt to reclaim Tel@net's stock — as was their right under the Pledge Agreement.

TSG Governance, its Concentrated Account, and its use of Cash

54. During TSG's existence, the TSG Directors did not conduct formal meetings of the board of directors. The TSG Directors did, however, participate in almost weekly informal meetings and significant discussions regarding TSG and its subsidiaries. "As was their practice when making business decisions, the meetings were not officially called board meetings, but instead were based on the practicalities of the situation concerning where and when they would meet." Adiletta Transcript ("Adiletta Tr."), 17:24-19:3; Patrizio Transcript ("Patrizio Tr."), 77:6-10, 84:21-85:9. Adiletta Certificate ("Adiletta Cert."), ¶ 36.

55. Concerning finances, TSG had two bank accounts: a concentration account and a disbursement account. The concentration account received all incoming funds generated for TSG by its subsidiaries. The disbursement account was a zero-balance account used by TSG for its account payables and expenses. TSG's concentration account was the source for payments from the disbursement account. State Court Deposition of John Pron ("Pron Tr."), 27:9-10; Adiletta Cert, Exhibit JJ, 4-5.

56. TSG used its concentration account as a centralized cash-pool to cover all expenses for Tel@net, NCI, and TSG. The concentration account contained a lockbox, which allowed for directly depositing all subsidiary revenue into the concentration account. Adiletta Cert, Exhibit JJ; Pron Tr., 132:8-13; 15. Defendants disclosed TSG's centralized cash management in the July 2000 Teleservices Group Financial Procedural Manual. Adiletta Cert., Exhibit JJ.

57. From the concentration account, TSG's primary focus was to ensure that sufficient funds were available to cover its payroll expenses. Secondary to that, funds were allocated to pay vendors and other expenses known to be due. Id.; Pron Tr., 35:3-8.

58. In addition to paying the TSG Directors' salaries, the TSG concentration account paid $26,000 in yearly membership fees to Fiddler's Elbow Country Club. This fee was the total amount for all Defendants, not individually. Id. at 11; Pron Tr., 134-35. Tel@net Sellers used the Club. Brief for Defendants, 24.

59. Defendants have certified that the books and records of TSG and its subsidiaries were kept in accordance with Generally Accepted Accounting Principles (GAAP), and were audited by certified public accountants, BDO Seidman, LLP. Additionally, payables and receivable ledgers were kept for each company. TSG maintained an ongoing general ledger, which recorded each subsidiary's gross income and expenses. Adiletta Cert, ¶ 63; Bankruptcy Court Deposition of John Pron, 24-25.

Salaries for TSG Directors

60. All salaries of Defendants were disclosed in TSG's Business Plan. Business Plan, 17.

a. Adiletta, as Chief Executive Officer and Director, was scheduled to receive an annual salary in the amount of $240,000;

b. Collins, as President and Director, was scheduled to receive an annual salary in the amount of $200,000;

c. Patrizio, as Chairman of the Board, Secretary, and Director, was scheduled to receive an annual salary in the amount of $180,000. Id.

61. The TSG Directors received only a portion of their salaries. Adiletta Cert, Exhibit GG.

62. In the two years of TSG's existence, the following amounts were received by Defendants:

a. Adiletta received $279,175 (out of $480,000);

b. Collins received $331,865 (out of $400,000);

c. Patrizio: the record is not clear; however, Apogee Partners, wholly owned by Patrizio, received $270,000. Id.; Patrizio Cert, ¶ 16, 17.

63. The TSG Directors each personally paid certain obligations of TSG and its subsidiaries. Each Defendant paid $200,000 as equal guarantors of the Brady/Fitzgibbon Loan. In addition, certain Defendants paid on behalf of TSG for Tel@net's payroll, legal fees and expenses, and insurance.

a. Adiletta paid $252,334 on TSG's behalf;

b. Patrizio paid $252,334 on TSG's behalf. Adiletta Cert., Exhibit HH; Patrizio Cert, Exhibit E.

Apogee Partners

64. Apogee Partners is a corporation wholly owned by Patrizio. Patrizio Tr., 12:21-25.

65. One of TSG's regular expenses included paying Apogee Partners $17,000.00 per month, plus expenses for which there was no accounting. Patrizio Tr., 49:12-15.

66. According to Patrizio, Apogee Partners provided financial consulting to TSG.¹⁰ Additionally, Apogee Partners assisted TSG in preparing business plans, preparing financial projections, and arranging for additional financing. Id., 49:18-24.

10 The Court notes for purposes of completeness that Apogee Partners is not a licensed investment banking firm; rather, Apogee Partners claims its purposes for incorporating was to act as a management consulting firm. Patrizio Tr., 14:4-6. Any possible misrepresentation to the investors of TSG or sellers of the "core companies" is of no moment to the Court, for that issue is beyond the scope of the adversary proceeding sub judice, and likewise remains under current review in a separate court of law. See Marrone, et al. v. Teleservices Group, Inc., et al., case no. 02-cv-5763(TCP) (E.D.N.Y.). Trustee's present action revolves around Defendants' alleged harm against TSG.

67. For its part in the closings of Tel@net and NCI, Apogee Partners received $100,000 in closing fees. Business Plan, 17.

68. Apogee Partners assisted in the Brady/Fitzgibbon Loan, which resulted in a $600,000 loan at an annual interest rate of 36%, buttressed by individual guarantees. There is testimony that indicates that Apogee Partners also assisted in later $100,000 infusion. Id., 51:7-10. Other than those two raises and TSG's initial capital raise, Apogee Partners was not instrumental in any other raises. Patrizio Tr., 53:2.

69. Apogee Partners helped assist TSG in preparing the Business Plan, including its approximately half-dozen modifications. Id., 54:15-25.

70. Apogee Partners kept no records of its meetings with investors — individuals or institutions — nor did it keep records of the services it provided to TSG. Id., 55:18-25.

71. Apogee Partners was not required to account for the services it provided to TSG. State Court Deposition of Paul Patrizio ("Patrizio State Tr."), 19:14-16. Additionally, TSG paid such fees regardless of whether services were rendered in a particular month. Id., 19:22-24.

72. At no time did Apogee Partners issue to TSG reports or other written recommendations about investments. Id., 19-22.

73. Apogee Partners began receiving $17,000 per month in September, 2000; that compensation ceased in February, 2001. In September, 2001, it resumed and continued monthly until April, 2002. Id., 17:24-18:5. After two years in existence, TSG paid Apogee Partners approximately $270,000, apart from the $100,000 received for its role in TSG's initial capital raise. Brief for Defendant, 23.

IV. CHOICE OF LAW

TSG is a New Jersey corporation. New Jersey corporation law, therefore, governs issues concerning the fiduciary duties owing by corporate directors.¹¹ Brotherton v. Celotex Corp., 202 N.J. Super. 148, 154 n. 1 (Law Div. 1985). The Court additionally notes, however, that New Jersey courts have previously sought guidance and instruction from Delaware case law when deciding matters involving corporate directors' decision-making. In re Merck Co. Sec., Derivative ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007) (citing In re PSE G S'holder Litig., 173 N.J. 258, 801 (2002); Kanter v. Barella, 489 F.3d 170, 178 (3d Cir. 2007) ("Because the New Jersey Supreme Court in PSE G sought guidance from Delaware's decisional law, we will do the same here."). In the absence of binding doctrinal authority from New Jersey, the Court here too reviews Delaware case law for guidance.

11 The laws for the state of incorporation govern a corporation's internal affairs. Fagin v. Gilmartin, 432 F.3d 276, 282 (3d Cir. 2005). In a prior unrelated matter, this Court was compelled to stray from this general tenet, for the conduct affecting the parties outside the state were so substantial and significant, and the impact on the parties outside the state was so great, that the mere classification of conduct as "internal affairs" could no longer be deemed controlling. See In re Allserve Systems Corp., 379 B.R. 69 (Bankr. D.N.J. 2007). The present matter is clearly distinguishable, in that the alleged malfeasance of Defendants pertains specifically to internal affairs, i.e., matters "between the corporation and its current officers, directors, and shareholders." McDermott Inc. v. Lewis, 531 A.2d 206, 216-17 (Del. 1987) (citations omitted). Thus, New Jersey law applies.

V. DISCUSSION

In the case at bar, the Trustee alleges that Defendants, directors of TSG, breached several duties owing to TSG.¹² The Trustee asserts that but for these breaches, TSG's bankruptcy estate would be considerably larger, to the benefit of TSG's creditors. To that end, the Trustee has the burden of proof to establish a causal link between these breaches and any harm sustained by TSG. Before meeting this burden, however, the Trustee must circumvent the New Jersey Business Judgment Rule, which prevents a court from reviewing or second-guessing management's conduct and decision-making. Maul v. Kirkman, 270 N.J. Super. 596, 614 (App.Div. 1994). Thus, the Court will review only those decisions from which the business judgment rule does not protect Defendants, and then assess whether there is a causal connection between such actions and alleged harm to TSG.

12 The Court emphasizes that TSG is the debtor in which shoes the Trustee stands, and to whom the Defendants owed their duties of care and loyalty.

The Court begins by determining whether the Trustee has rebutted the business judgment rule, both generally and as to particular decisions by Defendants. The Court first sets out the standard of law applied in New Jersey. Next, it analyzes which particular exercises of judgment are protected by the business judgment rule. Decisions unprotected by the business judgment rule are then analyzed to determine whether a causal link has been established between the alleged acts and harm. Finally, the Court ascertains the extent of damages.

A. The New Jersey Business Judgment Rule

Directors of a corporation owe fiduciary duties to the corporation and its shareholders.¹³ Whitfield v. Kern, 122 N.J. Eq. 332, 340-41 (1937). In exercising these duties, New Jersey Law provides that, when applicable, challenges to decisions made by corporate directors are subject to the business judgment rule. N.J.S.A. 14A:6-1; In re PSE G S'holder Litig., 173 N.J. 258, 277 (2002). As a matter of good public policy, the business judgment rule affords corporate directors the ability to take prudent business risks without the fear of judicial scrutiny if those risks prove incorrect or unwise in hindsight. Maul v. Kirkman, 270 N.J. Super. at 614. Serving as a shield, "[t]he business judgment rule protects a board of directors from being questioned or secondguessed on conduct of corporate affairs except in instances of fraud, self-dealing, or unconscionable conduct." Id.

13 The Court notes, but does not address, the Trustee's arguments concerning the possible fiduciary obligations of corporate directors owing to creditors of an insolvent corporation. See Nat'l American Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). Gheewalla clarified the issue regarding whether a cause of action existed for creditors to bring a derivative action (as opposed to a direct action) against an insolvent corporation. Gheewalla addressed to whom such duties are owed in cases of insolvency, not the extent or nature of such duties, as the Trustee appears to have argued. See E. Norman Veasey, Counseling the Board of Directors of a Delaware Corporation in Distress, 27-5 AM. BANKR. INST. J. 60 (2008). Whether the Trustee seeks a recovery herein while standing in the shoes of the corporation itself or on behalf of the corporation's creditors, he must still demonstrate to the Court's satisfaction that a breach of duty has occurred. For the reasons explained infra, the Trustee, for the most part, has not satisfied his burden.

The business judgment rule, however, functions only as a rebuttable presumption. Id. Challengers to a directorial decision bear the initial burden of overcoming this presumption by showing "self-dealing or other disabling factors" on behalf of the decision-maker. Id. Directors, individually or collectively, must make decisions in accordance with their fiduciary duties of care and loyalty, and at all times with good faith to promote the interests of the corporation and its shareholders. See In re PSE G S'holder Litig., 173 N.J. at 289-94 (applying such standard to a shareholder derivative action). See also Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 907 A.2d 27 (Del. 2006) (same); Stone v. Ritter, 911 A.2d 362 (Del. 2006) (same). Only after surmounting this burden will a court review the merits of a directorial decision.

1. Fiduciary Duty of Care

Under New Jersey law, directors of a corporation are obligated to "discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent people would exercise under similar circumstances in like positions." N.J.S.A 14A:6-14. Directors do not breach the duty of care simply because the outcome of a decision is unprofitable, wrong, unwise, foolish, etc. In re PSE G S'holder Litig., 173 N.J. at 291. Instead, this duty is breached when the decision-making process itself is below the degree of care that which a director "would exercise under similar circumstances." N.J.S.A 14A:6-14; Francis v. United Jersey Bank, 87 N.J. 15, 28 (1981).

The business judgment rule is "process oriented," and courts review only that underlying process. In re PSE G S'holder Litig., 173 N.J. at 291 ("the court's inquiry is not into the substantive decision of the board, but rather is into the procedures employed by the board in making its determination") (internal quotes omitted). "Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of [care]." In re Caremark Int'l, 698 A.2d at 968 (emphasis omitted); see also Francis, 87 N.J. at 31 ("Directors are under a continuing obligation to keep informed about the activities of the corporation."). The obligation to be informed, however, does not require directors to engage in a "detailed inspection of day-to-day activities." Francis, 87 N.J. at 31. Instead, directors "should become familiar with the fundamentals of the business" so that they may accomplish a "general monitoring of corporate affairs and policies." Id. at 31-32. To assist directors in being "informed," New Jersey law permits corporate directors to rely, in good faith, on the advice of professionals in making their decisions. N.J.S.A. 14A:6-14.

The degree of care a director may owe to a corporation is "dependent upon the type of corporation, its size and financial resources." Francis, 87 N.J. at 29. There is no "prescribed procedure that a board must follow" to definitively pronounce the degree of care legally acceptable. In re PSE G S'holder Litig., 173 N.J. at 291 (internal citations omitted). The process, rather, must be only that which a "prudent [director] would exercise under similar circumstances in like positions." N.J.S.A. 14A:6-14. New Jersey courts recognize that the degree of care owed to a small, closely held corporation may be different than that owed to a larger, public corporation. See In re PSE G S'holder Litig., 173 N.J. at 291 (recognizing that a bank director may be held to a stricter standard than the director of an ordinary business). Even though the standard of care fluctuates depending on the size, traits, and resources of the corporation, courts do not necessarily apply the reasonableness standard used in a negligence analyses. See In re Caremark Int'l, 698 A.2d 959, 968 n. 16 (Del.Ch. 1996) (explaining the benefits to the corporate form gained when directors take risks above those of "persons of ordinary judgment and prudence might"). Several courts, instead, apply a grossly negligent standard. See, e.g., Maul v. Kirkman, 270 N.J. Super. at 614; In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 748 nn. 417, 418 (Del. Ch. 2005); Estate of Carpenter v. Dineen, 2008 WL 859309, at *12, n. 156 (Del.Ch. 2008). A mere negligence standard would likely inhibit persons from becoming directors.

2. Fiduciary Duty of Loyalty

The fiduciary duty of loyalty mandates that corporate directors promote the best interests of the corporation and its shareholders, and not to benefit themselves. VFB LLC v. Campbell Soup Co., 482 F.3d 624, 634-35 (3d Cir. 2007). The duty of loyalty "requires an undivided and unselfish loyalty to the corporation [and] demands that there shall be no conflict between duty and self-interest." Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). The rule prohibits a corporate director from engaging in self-dealing or usurping corporate opportunities. Id.

"The threshold inquiry in assessing whether a director violated his duty of loyalty is whether the director has a conflicting interest in the transaction. Directors are considered to be `interested' if they either `appear on both sides of a transaction []or expect to derive any personal financial benefit from it in the sense of selfdealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally."

Seidman v. Office of Thrift Supervision, Dep't of the Treasury (In re Seidman), 37 F.3d 911, 934 (3d Cir. 1994) (alteration in original) (citation and quotation omitted). "Classic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders generally." Cede Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993) (internal citations omitted). The business judgment rule does not apply in cases where selfdealing is shown, which thereby permits judicial review of the transaction. Maul, 270 N.J. Super. at 614 ("The business judgment rule protects a board of directors from being questioned or second-guessed on conduct of corporate affairs except in instances of . . . self-dealing. . . .").

3. Use of Good Faith

Directors of corporations must exercise their corporate duties in good faith. N.J.S.A. 14A:6-14; Riddle v. Mary A. Riddle Co., 140 N.J. Eq. 315, (Ch. 1947). The requirement of good faith has been best explained by the Delaware Courts, and the Court takes guidance from same. See supra.

Bad faith has been defined as acting "for some purpose other than a genuine attempt to advance corporate welfare or [for purposes] known to constitute a violation of applicable positive law." Gagliardi v. Trifoods Int'l, 683 A.2d 1049, 1051 n. 2 (Del. Ch. 1996) (citing Miller v. AT T, 507 F.2d 759 (3d Cir. 1974) (emphasis omitted). A lack of good faith, as it now stands, "does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty." Stone, 911 A.2d at 370 (citing Cede Co., 634 A.2d at 361). Failing to act in good faith, as the Delaware Courts have explained, "is not conduct that results, ipso facto, in the direct imposition of fiduciary liability." Stone, 911 A.2d at 369-70. The principle of good faith, instead, is "embraced" in the duty of loyalty. Guttman v. Huang, 823 A.2d 492, 506 n. 34 (Del.Ch. 2003). ("A director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation's best interest"); see also E. Norman Veasey, Counseling the Board of Directors of a Delaware Corporation in Distress, 27-5 AM. BANKR. INST. J. 60 (2008).

A showing of bad faith requires the challenger to a corporate decision to meet a high standard. See Stone, 911 A.2d at 369 ("a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care ( i.e., gross negligence)). The Delaware Courts have classified into three categories directorial conduct deserving the "`bad faith' pejorative label":

The first category involves so-called "subjective bad faith," that is, fiduciary conduct motivated by an actual intent to do harm.

* * *

The second category of conduct, which is at the opposite end of the spectrum, involves lack of due care — that is, fiduciary action taken solely by reason of gross negligence and without any malevolent intent.

* * *

[The] third category is [an] intentional dereliction of duty, a conscious disregard for one's responsibilities [, which can be] properly treated as a non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith.

Brehm, 906 A.2d at 64-66. The Delaware Court here concluded that gross negligence alone, without more, cannot constitute bad faith. Id. at 64-65.

Examples of conduct satisfying the threshold for bad faith have included:

A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.

Id. at 67. If violations have not been shown, the presumption of the business judgment rule applies. Maul, 270 N.J. Super. at 614.

B. Allegations of Defendants' Breach of Duty of Care (Counts I IV)

1. TSG's Incorporation and its Business Plan and Concentration Account

TSG was incorporated as a holding company designed to acquire and consolidate telecommunication companies. TSG was duly incorporated with a legitimate business purpose and with an elected board of directors. TSG composed a Business Plan, which outlined its objectives and listed the specific companies it intended to purchase. Additionally, the Business Plan identified the TSG Directors and their respective salaries. Defendants duly complied with New Jersey law when incorporating TSG, and nothing within the Trustee's pleadings suggests Defendants failed to use care when incorporating TSG.

With respect to implementing TSG's Business Plan and purchasing Tel@net, the Trustee argues that Defendants breached their duty of care, because TSG was "insolvent from the start" and commenced with investor debt and without capital. Brief for Trustee, 6 (citing the deposition of John Pron). Unfortunately, the Trustee has cited no law forbidding a corporation from being founded on debt instead of equity. Quite the contrary, a corporation may be financed on debt; and public policy encourages this, for a minimum capital requirement might otherwise create an entry barrier for new start-up companies. Walkovszky v. Carlton, 244 N.E.2d 55 (N.Y. 1968). Additionally, when the corporate veil is pierced so that a court may hold shareholders personally liable, inadequate capitalization is only one of several factors considered by the sitting court. Verni ex rel. Burstein v. Harry M. Stevens, Inc., 387 N.J. Super. 160, 200 (App.Div. 2006). Finally, as shown below, TSG did, in fact, have sufficient working capital.

In support of the claim regarding TSG's lack of capital, the Trustee proffers evidence showing that Defendants failed to raise exactly $4.5 million (as reflected in the Subscription Offering) before implementing the Business Plan. TSG's Subscription Offering called for an initial capital raise of $4.5 million, $600,000 of which was designated as "working capital." After converting Defendants' salaries into stock, paying investment fees, and acquiring the "core companies," TSG had working capital in the amount of $564,831 — quite close to the $600,000 amount projected in the Subscription Offering; thus, TSG had sufficient working capital.

More importantly, however, the Court fails to see how this minor deficiency breached Defendants duty of care. The Trustee alleges that, because Defendants prematurely positioned TSG's Business Plan into course, TSG was "unmarketable . . . in the investment and telecommunications marketplace, irreparably damaging the potential for [TSG] to raise additional funding and fulfill its Business Plan." Trustee's Amended Complain, Count I(b). Naturally, TSG could not generate any profit were it not first placed into existence. More pointedly, TSG could not have acquired the "core companies" — the working force for TSG — without implementing the Business Plan. Besides alleging that TSG damaged its potential to raise more funds and damaged the good will of the "core companies," the Trustee has failed to show that the TSG Directors' decision to implement the Business Plan prematurely was made without exercising judgment on an informed basis. The very act of coordinating and implementing the Business Plan implies that some process was conducted. The Court finds that Defendants used due care in reaching these decisions.

Additionally, the Court notes that even without the protection of the business judgment rule, Defendants' actions could not have conceptually damaged or harmed TSG. The Trustee has not linked the alleged misrepresentations in the initial capital raise (or the conversion of Defendants' salary into stock) as being an actual or proximate cause of harm to TSG. The Trustee only has claimed, not proven, that the failure to actually raise $4.5 million rendered TSG insolvent ab initio and, therefore, as the Trustee says, "resulted in the immediate insolvency of Tel@net. . . ." Trustee's Complaint, ¶ 70. The Court does not agree. These alleged misrepresentations are beyond the scope of this matter, and any alleged injuries sustained by the Tel@net Sellers are being heard before another court of law. See Marrone, et al. v. Teleservices Group, Inc., et al., case no. 02-cv-5763(TCP) (E.D.N.Y.).

Turning to TSG's concentration account, the Trustee asserts that TSG's flawed centralized cash management system rendered the TSG Directors unable to monitor the performance of the subsidiaries. The Court disagrees for a variety of reasons. First, the Trustee has not directed the Court to New Jersey case or statutory law prohibiting a parent corporation from using a single concentration account to consolidate and operate the finances of its subsidiaries. The Court notes that, within the context of piercing the corporate veil, a centralized cash management system, "without `considerably more," is typically "insufficient to justify disregarding the corporate form." See Fletcher v. Atex, Inc., 68 F.3d 1451, 1459 (2d Cir. 1995) (quoting In re Acushnet River New Bedford Harbor Proceedings, 675 F. Supp. 22, 34 (D. Mass. 1987). Similarly here, the Court will not conclude that the mere use of a concentration account violated the TSG Director's duty of care to TSG.

Second, TSG disclosed the use of its centralized cash management system. All investors were aware of the concentration account. Indeed, TSG was founded with the notion of integrating interconnect communication companies into one entity — utilizing a centralized cash management system simply follows in suit. The Court considers TSG's cash management system to be "a function of administrative convenience and economy," rather than a breach of Defendants' duty of care.¹⁴ Id. (citing Japan Petroleum Co. (Nigeria) v. Ashland Oil Inc., 456 F. Supp. 831, 846 (D. Del. 1978). Third, Defendants have certified that TSG kept the books and records in accordance with General Accepted Accounting Principles — the Trustee has not rebutted that claim. Payables and receivable ledgers were kept for each company. Brief for Defendant, Certification of John Pron, Exhibit A. In sum, the Trustee has not presented sufficient evidence to persuade the Court that Defendants breached their duty of care owed to TSG by operating its finances through a single concentration account.

14 The use of a single concentration account to collect revenues and make expenditures on behalf of multiple entities is commonplace in the business community, where supported by software permitting the culling and production of separate receipt and disbursement data for each entity. By way of analogy, the Court is cognizant that each of its standing Chapter 13 trustees utilizes concentration accounts to collect monthly trustee payments and make monthly disbursements on behalf of nearly 30,000 separate Chapter 13 individual debtors.

2. TSG, Tel@net, and the NEC Debt

Under this heading, the Court groups together the TSG decisions involving the restructuring and guaranteeing of Tel@net's debt with NEC. Again, the Trustee has alleged a breach of duty of care. The Trustee, therefore, has the burden to show that these decisions are not protected by the business judgment rule; as discussed below, the Trustee has not rebutted this presumption.

TSG acquired Tel@net in August, 2000. At that time, Tel@net had a dealership agreement with NEC, which governed Tel@net's purchase and sale of NEC telecommunications products and the technical support services that NEC agreed to provide to Tel@net's customers. Tel@net had granted NEC a secured interest in its inventory, proceeds, and accounts receivable in return for extensions of credit. Before TSG acquired Tel@net, Tel@net fell into technical default of its Associates Agreement with NEC: Tel@net was in arrears by approximately $1.2 million. TSG essentially inherited the Tel@net debt. In January, 2001, TSG assumed Tel@net's debt and agreed to repay it by way of the Promissory Note to NEC. (This being the first decision Defendants allegedly made in breach of their duty of care.)

The second decision at issue pertains to Tel@net's second default, which occurred in July, 2001. To ensure that Tel@net continued receiving goods and services from NEC, TSG and NEC entered into the Reinstatement Agreement. The Reinstatement Agreement essentially mirrored the Associate Agreement, save the requirement that Tel@net's debt be paid in full by the end of December, 2001, three months later.

A third decision regarding Tel@net's debt to NEC occurred at the end of 2001. Tel@net, and therefore TSG, had defaulted on the Reinstatement Agreement. By the time April arrived, NEC enforced its rights under that agreement, and Tel@net once again was at risk of losing its prime distributor. Once more, Defendants attempted and struggled to keep Tel@net's relationship with NEC alive. This time, however, Defendants consulted TSG's corporate counsel, Phillips Nizer. Phillips Nizer advised the TSG Directors that no defenses were available to either Tel@net or TSG, as against NEC, and that the corporation's best option was to continue negotiating with NEC to restructure the debt. With little leverage, TSG and Defendants agreed to a Restructuring Agreement, which included the Confession of Judgment.

To overcome the business judgment rule, the Trustee must show whether the processes employed by Defendants for reaching these above decisions breached the duty of care. In re PSE G S'holder Litig., 173 N.J. at 291. The Trustee argues that, in the collective decisions where Defendants used TSG as a surety to retain Tel@net's business relationship with NEC, Defendants failed to use the degree of care that which a director "would exercise under similar circumstances." N.J.S.A 14A:6-14. The degree of care discharged by the individual defendants is a factual determination. Casey v. Brennan, 344 N.J. Super 83, 122 (App.Div. 2001). The Court finds that the Trustee has not shown that the TSG Directors' decisions involving Tel@net's debt were made without due care — that is, made uninformed and without exercising judgment. In re Caremark Int'l, 698 A.2d at 968.

Clearly, Defendants were informed of Tel@net's financial problem with NEC. Defendants, moreover, were cognizant that further financial hardships for Tel@net would develop if NEC ceased distributing Tel@net goods and, most importantly, technical services to Tel@net's clients. The TSG Directors knew that losing Tel@net's dealership with NEC meant that Tel@net's customers would be cut off from NEC's technical support service. The record shows that informal weekly conferences and discussions were conducted among the TSG Directors to discuss Tel@net's debt issues. Continued negotiations between TSG and NEC were also undertaken. Defendants themselves (albeit through informal conversations) — and with counsel — discussed their available options and alternatives for solving Tel@net's debt problems. Against this backdrop, Defendants decided to direct their efforts towards keeping the NEC relationship active. The Court is satisfied that Defendants engaged in a "good faith effort to be informed and exercise judgment" with respect to these decisions. In re Caremark Int'l, 698 A.2d at 968.

The Trustee has not refuted Defendants' evidence that informed discussions were held among and between the TSG Directors and with NEC. The Trustee, instead, argues that Defendants' failure to hold formal board meetings evidences a breach in due care. The Court disagrees, for the Trustee incorrectly relies on the degree of care exercised by directors of larger, public corporations. As the Francis Court held, the degree of care required is "dependent upon the type of corporation, its size and financial resources." Francis, 87 N.J. at 29. TSG, a nonpublic venture, had only four directors, each with personal investments in the corporation. It is completely within the realm of due care that formal board meetings with recorded minutes would be unnecessary and impractical. Additionally, the facts in Francis involved a director's failure to act, not the process used therein. The TSG Directors did not "shut their eyes" or sit idly by as the director did in Francis. Id. at 31. Rather, in the case at bar, there is no dispute that the TSG Directors were addressing Tel@net's debt problem. Indeed, nowhere does the record indicate any evidence of concerns raised by any of the Defendants regarding another's level of involvement or care.

The Trustee argues that Defendants' were not informed about the financial status of TSG. The Trustee asserts that Defendants were unaware that TSG did not have the capability to repay the Tel@net debt; and, as a result, it was without due care for TSG to assume Tel@net's obligations, let alone agree to the Confession of Judgment.¹⁵ While "directors should acquire at least a rudimentary understanding of the business of the corporation" and "become familiar with the fundamentals of the business in which the corporation is engaged," they need not engage in "a detailed inspection of day-to-day activities." Francis, 87 N.J. at 31-32. Based on the correspondence between NEC and Defendants, as well as the acknowledged weekly meetings and constant dialogue among and between Defendants and TSG's controller, the Court finds that Defendants maintained, at a minimum, a "rudimentary understanding" of TSG's financial position, permitting the proper exercise of judgment. Defendants were informed sufficiently to reach the conclusion that maintaining Tel@net's relationship with NEC would maximize TSG's value, and provide an opportunity to repay the debt in more flourishing times. The manner in which Defendants carried out their decisions, e.g., the Promissory Note, Reinstatement Agreement, Restructuring Agreement, and Confession of Judgment, are facts focusing on the content of the decision made, not to the process involved therein.

15 The Confession of Judgment and Restructuring Agreement granted NEC no greater rights than it previously held prior to the agreement. By agreeing to these terms, Defendants provided Tel@net with an additional month to secure outside financing or capitalization.

Lastly, concerning Tel@net's dire financial straits, the Trustee alleges that Defendants breached their duty of care by not seeking to reorganize or liquidate Tel@net under Chapter 11 of the Bankruptcy Code. The decision against filing bankruptcy is clearly protected by the business judgment rule. First, Defendants relied on the advice of counsel, which negates liability for breach of due care under N.J.S.A. 14A:6-14. Second, Defendants certified that this option was deliberated over and discussed at length. Finally, save his conjecture, the Trustee has offered no proof that Tel@net "was readily saleable in the open market for $10,000,000." See Trustee's Amended Complaint, Count I(g).¹⁶ Again, the questions being raised now by the Trustee address the merits of Defendants' decision, not the decision-making process. Accordingly, the Court finds that Defendants did not breach their duty of care with respect to its decision against placing Tel@net in bankruptcy.

16 The Trustee's assertion that Tel@net's financial woes were easily remediable through a Chapter 11 proceeding ignores the numerable and sizable hurdles, which Tel@net would have faced as a debtor in possession: the ability to use cash collateral, fund payment of professionals, secure DIP financings, confirm a Chapter 11 Plan, or procure a sale over the objections of the Tel@net Sellers (who maintained the contractual right to reclaim the stock held by TSG).

Throughout the Trustee's pleadings and response, he has injected improperly his judgment for that of the TSG Directors. The Trustee continually asserts that TSG breached its duty of care by not paying off the NEC debt completely when it had the financial means to do so — a fact which is not supported by the record. The Trustee instills his own judgment condemning Defendants for not filing bankruptcy relief for Tel@net. Ironically, the Trustee, on the one hand, claims that it was wrong for TSG to keep Tel@net alive by attempting to restructure the NEC debt, while on the other hand chastises Defendants for failing to sustain Tel@net as a going concern. The Court, however, does not review TSG's decisions in hindsight, nor does the Court supplant Defendants' judgment with its own. The fact that restructuring Tel@net's debt (instead of cutting loose Tel@net) did not prove to be profitable for TSG does not mean that the TSG Directors engaged in wrongdoing. Likewise, the fact that the TSG Directors may have made unprofitable or unwise decisions, does not mean that Defendants breached their duties owing to TSG.

It is clear to the Court that, as to the respective decisions regarding Tel@net and NEC, Defendants engaged in a "good faith effort to be informed and exercise judgment." In re Caremark Int'l, 698 A.2d at 968. The TSG Directors acted with care and did not blindly enter into the various agreements with NEC on behalf of TSG. Furthermore, the Defendants relied "on the advice of counsel, the cost and probable ineffectiveness of bankruptcy, [and] the expectation that significant investor funds may be forthcoming." Adiletta Cert., ¶ 47. Under the safe-harbor provision in N.J.S.A. 14A:6-14, Defendants are presumed to have exercised due care by relying on the advice of corporate counsel. Accordingly, the Court finds that Defendants did not breach their duty of care.

3. TSG, OneNet, and Purchasing Property Technologies

This next heading incorporates the decisions by the TSG Directors that ultimately led to the purchase of Property Technologies, Ltd. Just as before, the Trustee carries the burden to show why the business judgment rule does not apply. The Trustee has not averred facts indicating a breach of duty of loyalty. There is no suggestion that Defendants lacked disinterestedness by way of an interest in Property Technologies, other than the benefit that all TSG shareholders would share. Additionally, the Trustee has not argued that Defendants usurped for themselves a corporate opportunity presented first to TSG. (Indeed, it was TSG that purchased Property Technologies). Therefore, the Court reviews the process employed by Defendants in deciding to purchase Property Technologies.

In gauging challenges to corporate decisions alleged to constitute a breach of due care, the Court presumes that Defendants were exercising their business judgment, and the Court will not second guess this, save a lack of a "good faith effort to be informed and exercise judgment." In re Caremark Int'l, 698 A.2d at 968. It is the Trustee's burden to show otherwise. The heart of the Trustee's case is that Defendants breached their duty of care owed to TSG by purchasing Property Technologies, instead of using funds to repay Tel@net's debt owed to NEC. The Trustee further argues that Defendants made this decision without participating in formal board meetings.

The Trustee is again exercising hindsight judgment of the alternate avenues down which Defendants "should have" guided TSG. The Court will not accept this argument for a breach of due care when the TSG Directors have shown that they were informed in the decision-making process. Defendants have demonstrated that informal discussions and conversations occurred, which addressed the decision/risk in acquiring Property Technologies. As mentioned above, requiring Defendants to hold formal meetings is not mandated by New Jersey law before a reviewing court applies the business judgment rule. Francis, 87 N.J. at 29. Next, the Business Plan itself outlined TSG's intent to acquire interconnect companies such as Property Technologies. It cannot be said that Defendants harmed TSG by carrying out the Business Plan. Finally, by agreeing to purchase Property Technologies, Defendants raised $300,000 to be applied against Tel@net's indebtedness with NEC.

The Court further finds that the balance of $900,000 paid at closing came from the accounts of Property Technologies, and not from either TSG or Tel@net. Moreover, while as part of the purchase, TSG assumed substantial liabilities of Property Technologies, the record before the Court does not establish that the funds used to satisfy these liabilities necessarily originated from TSG or Tel@net, as opposed to the collection of Property Technologies' accounts receivable.¹⁷

17 The Court remains unpersuaded that even a decision to use Tel@net's cash to fund acquisitions or operations apart from Tel@net runs afoul of the duty of care. It is undisputed that the Tel@net Sellers maintained the right to take possession of the Tel@net stock upon default on the obligation owing the Tel@net Sellers. It is nonsensical to think that TSG would be best served by using all available cash to pay off Tel@net's debt to NEC, simply to see Tel@net stock returned to its former owners. By way of analogy, it would not be prudent for the management of a trucking firm to invest substantial funds into the repair of a truck, which is about to be repossessed. Rather, the firm would be far better served by using the cash to maintain or acquire other trucks to place into service.

In light of the Trustee's failure to show bad faith or self-dealing regarding the decision to acquire Property Technologies, and due to the fact that this decision was the result of an informed process, the Court holds that Defendants did not breach the duty of care by deciding to purchase Property Technologies.

4. Count IV

In its analysis of Count I and the duty of care, the Court has also addressed indirectly Count IV — the Trustee's allegations of Defendants' willful, wanton, and grossly negligent conduct. The Trustee makes the assertion of gross negligence, but his complaint and amended complaint is barren of facts beyond those discussed above; the complaint and amended complaint also fail to provide any nexus between the alleged breach and harm unto TSG.

New Jersey case law, in other contexts, has defined gross negligence as behavior falling into the "upper reaches of negligent conduct," including behavior that demonstrates an "indifference to consequences." Parks v. Pep Boys, 282 N.J. Super. 1, 17 n. 6 (App.Div. 1995); Banks v. Korman Assocs., 218 N.J. Super. 370, 373 (App.Div. 1987). The facts before the Court do not show Defendants being "[indifferent] to consequences." Banks, 218 N.J. Super at 373. Rather, there is sufficient evidence before the Court to conclude that Defendants carried out their duties with due care, e.g., awareness of Tel@net's indebtedness; a desire to keep the Associate Agreement in place; and numerous discussions and conversations between and among the TSG Directors and TSG's counsel. The Court finds that the Defendants' conduct was not grossly negligent; therefore, it denies an award of both compensatory and punitive damages. N.J.S.A. 2A:15-5.13(b).

C. Allegations of Breach of Duty of Loyalty (Counts II IX)

"The threshold inquiry in assessing whether a director violated his duty of loyalty is whether the director has a conflicting interest in the transaction." In re Seidman, 37 F.3d at 934. The duty of loyalty "requires an undivided and unselfish loyalty to the corporation [and] demands that there shall be no conflict between duty and self-interest." Guth, 5 A.2d at 510. The Court looks for instances of self-dealing (as usurpation of corporate opportunity is not at issue here), and if shown, the business judgment rule no longer applies. In re Seidman, 37 F.3d at 934. Without the protections of the business judgment rule, the Court reviews the disinterested transactions to determine whether the breach of duty is the proximate harm to the corporation.

1. Count IX

Beginning with Count IX, the Court notes at the outset that Defendants were neither on both sides of the NEC transactions, nor with respect to the acquisition of Property Technologies; thus, there can be no self-dealing regarding these decisions. However, the Court's inquiry does not end here. TSG Directors did enter into contracts and authorize payments to entities wholly owned by individual Defendants. Pertinently, the Court takes issue with the payments made to Apogee Partners subsequent to the initial raise.

Apogee Partners is a corporation wholly owned by Patrizio. TSG Directors authorized TSG to pay Apogee Partners $17,000 per month, plus expenses. Having Patrizio representing both sides of the transaction makes this a "classic example" of self-dealing. Cede Co. v. Technicolor, Inc., 634 A.2d at 362. Without the presumption of the business judgment rule, the Court, therefore, may review Defendants' conduct and determine whether such conduct caused and contributed to TSG's harm.

Based on the record before the Court, besides the initial capital raise and the production of the Business Plan, Apogee Partners did not perform services consistent with its level of compensation. Apogee Partners was paid regardless whether it performed any services; indeed Defendants could not have known if Apogee Partners performed services, for TSG did not require Apogee Partners to submit records to that effect. Additionally, Apogee Partners did not issue reports or written recommendations to TSG regarding investments. In the end, Apogee Partners received approximately $270,000, separate and apart from the $100,000 received for raising TSG's initial capital, for illusory services. The evidence submitted as to the potential investment contacts made by Apogee Partners amounts to little more than could be expected to be gained at a single cocktail party. It is insulting to suggest that procuring a $600,000 loan at 36% annual interest merited the $17,000 monthly fees.¹⁸ The Court finds that TSG Directors breached their duty of loyalty by permitting these payments; the money disbursed to Apogee Partners should have remained in TSG's concentration account for other purposes within Defendants' business judgment, e.g., paying NEC, paying other creditors, etc. But for the fact that TSG extended payments to Apogee Partners, TSG would have had either a larger bankruptcy estate or less debt.

18 The Court notes that this unsupportable compensation arrangement exceeds even the overly generous total fees of $1.25 million that were to be paid out under the proposed initial raise of $4.5 million. Adiletta Cert., ¶ 7, Exhibit D.

Concerning Collins and Associates, a corporation wholly owned by Collins, the record before the Court reveals that TSG made payments to this entity — with Collins on both sides of the transaction. Pron Tr., 45-47. Unlike the Apogee Partners transactions, however, the Trustee has not provided the Court with satisfactory evidence that TSG did not benefit from those transactions, let alone prove causation that TSG was damaged by $10 million as a result. The Court summarily dismisses the Trustee's allegations concerning Collins and Associates.¹⁹

19 The record pertaining to the role Collins and Associates assumed vis-à-vis TSG and its subsidiaries is limited and sparse. The absence of facts spawned the Court's December 2 letter to the parties, whereby the Court asked the Trustee to cite to the record or further describe its claim. The Trustee pointed the Court to the limited evidence already reviewed.

With respect to withdrawing funds from TSG without explanation, the business judgment rule protects Defendants' decisions and choices. The Trustee has attempted to itemize every payment made by TSG; but where self-dealing or bad faith have not been shown — and where an informed decision-making process has — the Court will not substitute the TSG Directors' judgment for its own, or that of Trustee. Maul, 270 N.J. Super. at 614. With the exception of payments to Apogee Partners, the Court presumes that these isolated expenditures were for legitimate business purposes. For instance, Trustee complains that Defendants made payments on behalf of TSG for insurance premiums, consulting fees, golf club memberships, ²⁰ computer charges and installation, and rent. The Trustee, however, has not offered evidence (aside from being paid out of TSG's concentration account) showing these expenses to be irrational, in bad faith, or made to an interested director. While the Trustee has pointed to entries in the TSG books and records with which Defendants were unfamiliar, a lack of understanding or memory, without showing a duty breach, does not rebut the presumption. See id. (noting that the business judgment rule presumes the appropriateness of directorial decisions with respect to expenditures/dividend payments); see also Francis, 87 N.J. at 31 (showing that directors need not engage in a "detailed inspection of day-to-day activities").

20 Defendants have offered evidence demonstrating that TSG's membership at Fiddler's Elbow County Club was not used exclusively by the TSG Directors. TSG used this membership to entertain vendors and clients, such as NEC. Brief for Defendants, 51. Notwithstanding, the Court is compelled to note that Fiddler's Elbow County Club offers 54 beautifully maintained holes of golf, with forgiving fairways, fast greens, challenging pin placements, and unmatched vistas. The $26,000 corporate membership rate is unparalleled in Northern New Jersey, and the Court cannot conclude that Defendants breached their respective fiduciary duties by pursuing such membership to originate business investment.

Finally, with respect to Defendants' salaries, the Trustee claims that the TSG Directors did not devote time to the business and, therefore, do not deserve compensation. The Court disagrees. Defendants did devote time to TSG, and the Court most certainly cannot order Defendants to relinquish a salary that was fully disclosed and agreed to by all investors. To the contrary, Defendants have shown that they provided a multitude of services and a substantial amount of time and money to further benefit TSG. First, Defendants were not paid for developing and organizing TSG — their fees were paid by TSG with company stock. Second, Defendants deferred their compensation from TSG, with portions never recouped. Since establishing TSG, Defendants continued to raise money and expand TSG's growth, pursuant to the Business Plan. Third, Defendants each personally guaranteed various loans made to TSG, as with the Brady/Fitzgibbon Loan. Between deferred compensation, payment in stock, and using personal funds to pay TSG obligations, "the TSG Directors clearly came out as losers from TSG's failure."²¹ Brief for Defendants, 52. Finally, the Trustee has not established by law that paying reasonable salaries to corporate directors harms a corporation or breaches a duty of loyalty.

21 Defendants submitted calculations depicting what Defendants paid out of pocket against what salaries Defendants received. These calculations show that Adiletta received less than $30,000 for his efforts on behalf of TSG. Brief for Defendants, 51. As to Patrizio, the Court disagrees with Defendants calculations, because these figures do not include compensation Patrizio received by way of Apogee Partners. The facts pertaining to Collins, furthermore, are limited and prevent the Court from determining exactly what amounts were received.

2. Count II

In this Count, the Trustee alleges that Defendants breached their duty to TSG by not contributing cash to acquire their TSG stock interests. The Trustee further alleges that Defendants disregarded the TSG investors, the Tel@net Sellers, and all creditors.

First, the Trustee has not directed the Court to New Jersey statutory or case law that requires stocks to be purchased exclusively by way of cash. The Trustee has not shown the Court that other forms of consideration, such as labor or property or future promises of both, are impermissible under New Jersey law. Defendants, on the other hand, have demonstrated that the TSG Directors worked in furtherance of promoting TSG (including conceiving TSG, identifying target companies, and raising the capital to start the company); that the TSG Directors deferred their salaries; and that Defendants used personal funds — all of which negate a finding of selfdealing or that Defendants worked "with a material financial interest which conflicted with Defendants' fiduciary duties." Trustee's Complaint, Count II, ¶ 246. Second, the Trustee has not explained or established how Defendants disregarded the TSG investors, nor how Defendants breached their duty of loyalty to the investors. Accordingly, the Court summarily dismisses this Count.

D. Good Faith — Count III

The Court next addresses the Trustee's assertions regarding Defendants' good faith (or lack thereof). The Court has set forth the rule of law it intends to follow regarding this claim; and, as mentioned above, Delaware case law provides the Court with much guidance as well.

The Trustee neither has pointed to specific facts, nor arranged a cohesive legal argument for the Court to render a finding of bad faith. The Trustee has not presented the Court with instances where Defendants acted intentionally to harm TSG; to violate positive law; or to consciously disregard fiduciary duties. On the contrary, the facts show that the TSG Directors were attempting to advance TSG's corporate welfare by maintaining Tel@net's relationship with NEC and by acquiring Property Technologies, which were both consistent with TSG's Business Plan. The Trustee's assertions and bald legal arguments cannot rebut the business judgment rule's presumption of good faith. The fact that TSG did not prove to be a successful business venture in the long run does not mean that Defendants acted in bad faith.

E. Misappropriation — Count VI

The Court finally directs its attention to the Trustee's allegations that Defendants inappropriately converted and/or misappropriated the gross revenues of the subsidiary corporations for the payment of their salaries. Upon review of the record and legal arguments, the Trustee has not provided the Court with statutory or doctrinal precedent to support the claim. The Trustee's claim essentially mirrors Count I.f, which faults TSG's accounting system. As mentioned above, Defendants did not breach a duty owing to TSG regarding corporate accounting. Additionally, to the extent the Trustee's argument relates to Defendants' receipt of compensation for their efforts, the Court has already held that, with the exception of Apogee Partners, compensation was disclosed, appropriate, and presumed appropriate by way of the business judgment rule. Due to the fact that the Trustee has not presented any legal argument whatsoever linking the alleged breaches as the cause for the alleged harm, and due to the fact that the Court finds that TSG utilized a cash-management system consistent with TSG's business model, the Court summarily dismisses Count VI.

VI. CONCLUSION

Over four years ago, the Trustee moved for an entry of default judgment against Defendants. The Trustee presented testimony from the Tel@net Sellers, detailing how Tel@net operated before being sold to TSG and how the value of the company "plummeted precipitously." In denying the entry of default, Bankruptcy Judge Ferguson recognized the difficulties that the Trustee faced in proving the alleged conduct. Judge Ferguson was also sympathetic the Tel@net Sellers, who saw Tel@net's existence crumple away; however, Judge Ferguson held that "sympathy . . . is an insufficient basis for entry of a judgment." Judge Ferguson's Opinion, dated October 18, 2004 (docket # 14).

Four years later, the Trustee remains unable to prove that Defendants' actions diminished, damaged, and harmed TSG's bankruptcy estate. Primarily, the Trustee's multiple causes of action have been thwarted by the presumption of the business judgment rule, which the Trustee has been unable to overcome. Secondarily, the majority of the Trustee's evidence continues to be projection, conjecture, and speculation as to how Defendants' intentionally and without good faith set out to harm TSG. The Trustee here again "expects the [C]ourt to infer a cause of action based solely on the undisputed fact that the value of [Tel@net] plummeted precipitously." Id.

For the reasons set forth above, the Court grants partial summary judgment in favor of Defendants, dismissing Counts 1, 2, 3, 4, and 6 of the amended complaint. The Court further grants the Trustee's motion for summary judgment on Count 9, alleging breach of fiduciary duty by Defendants, and awards damages in the amount of $270,000 representing the sums paid by TSG to Apogee Partners subsequent to the initial raise. Plaintiff is directed to submit a final judgment under the 5-day rule.

NOTICE OF JUDGMENT OR ORDER Pursuant to Fed.R.Bankr.P. 9022

Please be advised that on January 15, 2009, the court entered the following judgment or order on the court's docket in the above-captioned case:

Document Number: 121-1

Opinion (related document:[1] Complaint filed by Plaintiff Barry W. Frost). The following parties were served: Plaintiff's Attorney, Defendant's Attorneys. Signed on 1/15/2009(slf)

Parties may review the order by accessing it through PACER or the court's electronic case filing system (CM/ECF). Public terminals for viewing are also available at the courthouse in each vicinage.