AP Servs. LLP v. Silva
| Decision Date | 07 November 2012 |
| Docket Number | No. 11 Civ. 3005 (LAK).,11 Civ. 3005 (LAK). |
| Citation | 483 B.R. 63 |
| Parties | AP SERVICES LLP, in its capacity as Trustee of the CRC Litigation Trust, Plaintiff, v. Jerry SILVA, Steven Silva, Rosalie Silva, in her personal capacity and as Trustee of the Jody R. Silva Trust, and Jerry Silva and Steven Silva, in their capacity as Co–Trustees of the Jerry Silva 2007 Annuity Trust, Defendants. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Andrew M. Leblanc, Millbank, Tweed, Hadley & McCloy LLP, for Defendant Jerry Silva.
Patrick T. Collins, Ted A. Berkowitz, Farrell Fritz, P.C., for Defendant Steven Silva.
Matthew D. Kane, Bijan Amini, Storch Amini & Munves PC, for Defendant Rosalie Silva.
Jason N. Zakia, Douglas P. Baumsteim, Adam M. Burton, White & Case LLP, for Plaintiff AP Services, LLP.
This is an action brought by the trustee of the CRC Litigation Trust (the “Trustee”), an entity created by the bankruptcy court to pursue claims on behalf of the bankrupt estate of Chem Rx Corporation (“CRC” or the “Company”), to avoid and recover transfers, and for other relief, in connection with a 2007 leveraged buyout of CRC's predecessor in interest. It is brought under Sections 544(b) and 550 of the Bankruptcy Code and the New York Debtor & Creditor Law.
Defendant Jerry Silva founded B.J.K. Inc, a New York corporation doing business as Chem Rx 1 (“Chem Rx”), in 1958 and grew it from a single retail pharmacy to the third largest long-term care pharmacy in the United States.2 Jerry Silva served as its chief executive officer and the chair of its board of directors.3 His son, Steven, was the chief operating officer and a member of the company's board of directors.4 Jerry's wife, Rosalie Silva, was the trustee of the Jody R. Silva trust. 5
On October 26, 2007, the Silvas, Chem Rx's principal shareholders,6 sold their shares to Paramount Acquisition Corporation (“Paramount”), a “blank check acquisition vehicle formed and funded ... for the express purpose of effectuating a business combination with an entity operating in the health care industry,” 7 as part of a leveraged buy out (“LBO”). Paramount then merged with Chem Rx, and the surviving company's name was changed to Chem Rx Corporation (“CRC”).8
The second amended complaint (“SAC”) alleges that the LBO consisted of two parts: (1) the sale of the Silvas' stock, pursuant to a Stock Purchase Agreement (“SPA”), to Paramount, and (2) the financing for that stock purchase, which was provided pursuant to credit agreements into which Paramount entered to effectuate the LBO.9 The SAC alleges that the closing of the SPA was contingent upon Paramount obtaining the financing to fund the stock purchase. 10 To do so, Paramount entered into credit agreements with lenders that loaned it $177 million, which was paid to CRC on the date of the LBO 11 and used to buy the Silvas' stock.12
The Trustee claims that the Silvas, in order to secure the loans to CRC, prepared documents—which were presented to prospective lenders—that misstated Chem Rx's historical financial performance and “proffered unreasonable future projections for [CRC] based on false financial data.” 13 In fact, the Trustee claims, the Silvas “knew that the Company could not actually support the debt levels to be incurred in connection with the LBO Transaction and that the Company would be left with unreasonably small capital and unsustainable levels of debts.” 14 The lenders allegedly relied on this misinformation, and CRC used the proceeds from the loans to pay the Silvas $106 million for their stock.15 Jerry and Steven Silva continued to serve as officers and members of CRC's board of directors.16
In the year following the LBO, CRC violated its loan covenants and was in default on its obligations.17 It filed for bankruptcy in 2010, three years after the LBO, and ultimately was liquidated.18
The Trustee makes essentially two claims: that (1) that the payments made by Paramount to the Silvas in exchange for their stock were fraudulent transfers, as they were made with actual intent to defraud CRC's creditors and, in any case, without fair consideration and rendered CRC insolvent or left the company with unreasonably small capital to supports its future operations,19 and (2) that the Silvas breached their fiduciary duties to CRC by mismanaging the company and causing it to incur debt they knew it could not repay. Count One of the SAC seeks to avoid and recover the transfers made to the Silvas as part of the LBO.20 Counts Two and Three seek damages against Jerry and Steven Silva for breaching their fiduciary duties to CRC and aiding abetting one another's breaches of fiduciary duty. 21 Count Four seeks damages against Rosalie Silva for aiding and abetting the breaches of fiduciary duty by Jerry and Steven.22 Count Five is for unjust enrichment against all of the defendants.23
The Silvas argue that all of the Trustee's claims are barred by the securities settlement payment safe-harbor provision of the federal Bankruptcy Code, 11 U.S.C. § 546(e), and, in any event, are not adequately pleaded.24
To survive a Rule 12(b)(6) motion, a plaintiff must plead sufficient facts “to state a claim to relief that is plausible on its face.” 25 A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” 26 The Court accepts as true all well-pleaded factual allegations, and “draws all inferences in the plaintiff's favor.” 27 In deciding a motion to dismiss, a court considers the complaint and “any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” 28
Section 544(b) of the Bankruptcy Code allows a trustee to “avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding any unsecured claim....” 29 The “applicable law” in this case is the New York Debtor and Creditor Law, which, inter alia, allows a creditor to set aside any fraudulent conveyance “to the extent necessary to satisfy his claim.” 30Section 546(e) of the Bankruptcy Code, however, exempts “settlement payments” from avoidance:
“Notwithstanding section[ ] 544 ... of this title, the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7)....” 31
The Bankruptcy Code defines a “securities contract” as a “contract for the purchase, sale or loan of a security,” 32 and a settlement payment as “a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.” 33 Circuit courts, seeking to clarify this circular definition, have made clear that “a settlement payment is generally the transfer of cash or securities made to complete a securities transaction.” 34
The fundamental issue thus is whether the payments made to the Silvas as part of the LBO fit within the language of the statute and courts' understanding of what constitutes a settlement payment. Several circuit courts have held that a “payment made for shares during an LBO is obviously” 35 a “commonly used securities transaction” 36 and therefore fits within the statute's definition of a settlement payment. The Trustee argues, however, that, even when made as part of an LBO, payments for securities are “settlement payments” only when they pass from the purchaser of the securities through a financial intermediary to the seller. Because the payments here were made directly from Paramount to the Silvas' bank accounts and there was no “securities clearing agency or other financial institution in the middle of the transaction,” the payments do not fit within Section 546(e).37
A number of courts indeed have held that, in order for a payment in a securities transaction to constitute a “settlement payment” for purposes of Section 546(e), it must travel through the “settlement payment system,” in which a financial intermediary—generally a securities clearing house—takes title to and a beneficial interest in the securities.38 In Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., however, the Second Circuit rejected any such requirement, holding that payments for securities were “settlement payments” even where “no financial intermediary took a beneficial interest in the exchanged securities during the course of the transaction.” 39 In so doing, moreover, it relied upon decisions of three other circuits that affirmed “application of the safe harbor to leveraged buyouts of private companies that involved financial intermediaries who served only as conduits.” 40 Indeed, the Second Circuit referred with approval to their view that the purpose of the safe harbor rule was served by applying it to LBOs because “undoing long-settled leveraged buyouts would have a substantial impact on the stability of the financial markets, even though only private securities were involved and no financial intermediary took a beneficial interest in the exchanged securities during the course of the transaction.” 41
The Trustee contends that Enron cannot be expanded to apply...
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