In re Central European Industrial Development Co., LLC

         August 31, 2009.

          SECOND MEMORANDUM DECISION ON PARTIAL SUMMARY JUDGMENT

          DENNIS MONTALI, Bankruptcy Judge

         The following are the court's rulings on plaintiffs' Lehman Brothers Holdings, Inc. ("Lehman"), on its own behalf, and on behalf of the bankruptcy estate of The Kontrabecki Group LP ("TKG")(together with Lehman, the "plaintiffs"), Motion for Partial Summary Judgment on Plaintiffs' Sixth Cause of Action in their Third Amended Complaint, and defendant John Kontrabecki's ("Kontrabecki") Eighth Affirmative Defense stated in Kontrabecki's Amended Answer. The following is also the court's ruling on defendant Kontrabecki's Motion for Summary Judgment on these same issues.

         Lehman is entitled to partial summary judgment on its Sixth Cause of Action (Interference with Contract) and on Kontrabecki's Eighth Affirmative Defense (Manager's Privilege). Kontrabecki's motion on each will be denied. For purposes of these motions only, issues of Kontrabecki's intent are irrelevant.

         I. Sixth Cause of Action by Lehman.

         Lehman has established as a matter of law that it, CEIDCO and TKG were parties to several contracts, including the Credit Agreement. Those agreements created a complex security structure that had value to Lehman far beyond the mere worth of the shares of WDC and OBC to TKG. See Memorandum Decision on Partial Summary Judgment dated August 27, 2009, 2:9-13, dkt. no. 1856.

         The record is also replete with evidence that Kontrabecki was intimately aware of those contracts, and, further, he knew that the share dilution transaction ("SDT") he caused to happen would undermine and interfere with Lehman's contractual relationships. More specifically, at the minimum, TKG's (and thus ultimately Lehman's) right to vote the shares of WDC and ODC was destroyed as a result of the SDT. Whether Lehman had other alternatives need not be addressed here; if it did, and Kontrabecki prevails under his mitigation or no damage defense, he will escape monetary liability on this cause of action. Lehman's damages remain to be established, as do other defenses raised by Kontrabecki and not addressed in the parties' motions.

         Kontrabecki's argument that Marin Tug & Barge, Inc. v. Westport Petroleum, Inc. , 271 F.3d 825 (9th Cir. 2001) provides a bar to Lehman's Sixth Cause of Action is unavailing. To begin with, that case is only about intentional interference with prospective economic advantage; intentional interference with contractual relations was expressly not at issue. Id. at n. 3 ("The amended complaint also alleged intentional interference with contractual relations, a claim not at issue in this appeal"). Thus, the statement in Kontrabecki's Reply brief at 15:10-12 about the Ninth Circuit's interpretation of California law in incorrect.

         But even if the Marin Tug principle has been extended to interference with contractual relations, the clear holding of the case is that the defendant's conduct must be objectively wrongful, and not whether some subjective bona fide intent will provide a defense. There, the defendant's conduct was not wrongful while here it plainly was in violation of sections 362 and 363 of the Bankruptcy Code. Thus, even if there were a higher threshold of proof of the defendant's conduct - notwithstanding the authorities cited by Lehman in footnote 36 of its Memorandum of Points and Authorities in Support of Partial Summary Judgment - the test has been met.

         In reaching the foregoing conclusion the court agrees with the persuasive reasoning of G&C Auto Body, Inc. v. GEICO Gen. Ins. Co. , 552 F.Supp.2d 1015 (N.D. Cal. 2008) and declines to follow the non-binding decisions in ViChip Corp. v. Lee , 438 F.Supp.2d 1087 (N.D. Cal. 2006) and Nat'l Rural Telecomms. Coop. v. DirecTV, Inc. , 319 F.Supp.2d 1059 (C.D. Cal. 2003) relied on by Kontrabecki. Thus, Kontrabecki's status as "not a stranger" does not provide him with immunity on this cause of action.

         II. Kontrabecki's Eighth Affirmative Defense.

         Kontrabecki's Eighth Affirmative Defense must also fail because, as noted in the August 27, 2009 Memorandum Decision, the court has already determined that the SDT was adverse to the interests of the TKG estate. See Finding of Fact #14, Sept. 17, 2003. The defense Kontrabecki asserts is available to a manager who demonstrates a predominant motive of serving the interests of the principal AND otherwise acts lawfully. For purposes of this ruling on these motions, the court will consider Kontrabecki's declaration to the extent he contends that he was acting for the good of TKG. Unfortunately, that gets him nowhere because he has not demonstrated that his conduct did not otherwise violate the law.

         The fact that no cases have applied this result because of a violation of the Bankruptcy Code is equally unavailing. The words of Section 769 of the Restatement (Second) of Torts quoted by Lehman in its Reply brief at 30:14-17 are unequivocal. Section 362 was violated. The court has already rejected Kontrabecki's In re Tippett , 542 F.3d 684 (9th Cir. 2008) argument (see Order denying Kontrabecki's Motion for (1) Reconsideration of Prior Orders Granting Motion for Partial Summary Judgment on First Claim for Relief for Violation of the Automatic Stay, and (2) Order Dismissing First Claim for Relief, dated February 15, 2009, dkt. no. 1705), and he offers no substantive defense that the SDT did not violate section 363.

         In summary, the law was violated; Kontrabecki's subjective intent notwithstanding, he cannot invoke a manager's privilege on this record.