Holliday v. K Rd. Power Mgmt., LLC (In re Bos. Generating LLC)

• Decision Date: 18 June 2020
• Docket Number: Adv. Proc. No. 12-01879 (RG),Case No. 10-14419 (SCC)
• Citation: 617 B.R. 442
• Parties: IN RE: BOSTON GENERATING LLC, et al., Post-Confirmation Debtors. Mark Holliday, as the Liquidating Trustee of the BosGen Liquidating Trust, Plaintiff, v. K Road Power Management, LLC, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

617 B.R. 442

IN RE: BOSTON GENERATING LLC, et al., Post-Confirmation Debtors.

Mark Holliday, as the Liquidating Trustee of the BosGen Liquidating Trust, Plaintiff,

v.K Road Power Management, LLC, et al., Defendants.

Case No. 10-14419 (SCC)

Adv. Proc. No. 12-01879 (RG)

United States Bankruptcy Court, S.D. New York.

Signed June 18, 2020

Joshua J. Bruckerhoff, Gregory Schwegmann, Reid Collins & Tsai LLP, Austin, TX, Jeffrey R. Erler, Brian N. Hail, Allison F. Jacobsen, Michael J. Lang, William S. Richmond, Gruber Hurst Johansen Hail Shank LLP, Laura M. Fontaine, Hedrick Kring, PLLC, G. Michael Gruber, Dorsey & Whitney LLP, Jeffrey S. Levinger, Levinger PC, Dallas, TX, Jonathan M. Horne, Murtha Cullina LLP, Steven C. Reingold, Jager Smith P.C., Boston, MA, Yonah Jaffe, William T. Reid, IV, Reid Collins & Tsai LLP, Matthew P. Morris, James J. Sabella, Grant & Eisenhofer P.A., New York, NY, for Plaintiff.

Philip D. Anker, Alan Evan Schoenfeld, Wilmer Cutler Pickering Hale and Dorr LLP, Maria A. Bove, Pachulski Stang Ziehl & Jones LLP, Harris N. Cogan, Michael P. Smith, Blank Rome, LLP, Lawrence P. Gottesman, Allegaert Berger & Vogel LLP, David M. Hillman, Proskauer Rose LLP, Ramsey Hinkle, Denis Patrick Kelleher, Clayman & Rosenberg LLP Chris LaRocco, Bryan Cave Leighton Paisner LLP, Sean O'Donnell, Shivani Poddar, Stephen B. Selbst, Herrick, Feinstein LLP, James Tecce, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, Matthew G. Bouslog, Oscar Garza, Gibson, Dunn & Crutcher LLP, Irvine, CA, Allison Hester-Haddad, Wilmer Cutler Pickering Hale & Dorr LLP, Washington, DC, Richard W. Reinthaler, Pinehurst, NC, Dean A. Ziehl, Pachulski Stang Ziehl & Jones LLP, Los Angeles, CA, for Defendants.

MEMORANDUM OPINION RESOLVING MOTION TO DISMISS THIRD AMENDED COMPLAINT

Honorable Robert E. Grossman, United States Bankruptcy Judge

I. Introduction¹

This adversary proceeding was commenced almost eight years ago to recover approximately $1 billion in allegedly fraudulent transfers under New York State law by the Debtors to the Defendants. The Trustee asserts claims for intentional and constructive fraudulent transfers under New York's DCL, as well as under the theory of unjust enrichment. In response, the Defendants filed the MTD asserting, among other things, that: (i) the Trustee's claims were time barred; (ii) the Trustee failed to state a plausible claim for relief; (iii) the transfers sought to be avoided are safe-harbored pursuant to section 546(e) of the Bankruptcy Code ; and (iv) the Lenders ratified the transfers and thus, are estopped from now trying to avoid and recover the transfers. For the reasons stated below, the Court dismisses all counts pursuant to section 546(e) of the Bankruptcy Code. Notwithstanding the fact that Counts I through V of the TAC are dismissed pursuant to the safe harbor of section 546(e), the Court will provide an analysis below of all the legal issues raised by the parties in their papers. The legal conclusions the Court reaches were shaped by an analysis of all the legal issues presented and therefore warrant explanation.

The questions posed in the MTD and the Opposition thereto raise a series of complex and, in some instances, novel issues. However, at its very heart, the issue for the Court is whether to apply an analysis of the facts in isolation or to apply an approach that looks at the transactions at issue in a broader sense so as to view the entire picture established by the record. How a court applies applicable law is very often a function of how the court views facts presented. First, the parties ask the Court to interpret a Delaware Statute of Repose, which limits the claw-back period to three (3) years to recover a wrongful distribution made to a Delaware LLC's members. The Defendants ask the Court to find that the three (3) year limitation period contained in the Delaware Statute of Repose applies not only to claims for wrongful distribution brought by a Delaware LLC against its own members, but also to claims asserted by creditors to recover the same distribution. There is a dearth of authority interpreting the statute of repose as it applies to the issues before the Court. However, based on the Court's analysis of the statute and relevant case law, the Court finds the Delaware Statute of Repose does not apply in the instant case.

Second, the Defendants ask this Court to find that the Trustee's pleadings fail to satisfy the threshold requirement of setting forth a plausible basis for relief. At the most basic level, the Trustee's complaint is premised on the alleged illegality of the Debtors' 2006 leveraged recapitalization. This recapitalization was funded by more than $2 billion in loans from, among others, Bank of America, N.A., Carlyle Capital Investment, LTD, Credit Suisse (Cayman Islands Branch), and Goldman Sachs Credit Partners L.P. The Defendants proffer that because the loans were made by some of the world's most sophisticated financial institutions it is implausible to conclude those same lenders were defrauded. Notwithstanding the Court's skepticism as to the Trustee's probability of success on the claims asserted, that is not the appropriate inquiry at this stage of the proceeding. The Court must determine whether the Trustee has articulated more than a "sheer possibility" for obtaining the relief sought. The Court holds the TAC clearly articulates a claim, that the parties/people in control of the Debtors engaged in a scheme to hinder, delay, and defraud the creditors/lenders that financed the Leveraged Recap Transaction by making material misstatements and omissions during the course of the Lenders' due diligence, which formed the basis for their decision to lend. The Court is hesitant to assume that the size of an institution insulates it from being a victim of a fraud. The Court's determination as to whether the Trustee will be able to establish that this conduct rises to the level of being violative of the law and the damages for such actions must be left to another day.

A sub-issue to the Defendants' plausibility argument concerns whether the Trustee, for his intentional fraudulent transfer claims, was required to plead that a "critical mass" of the EBG board of directors, which approved the Leveraged Recap Transaction, acted with fraudulent intent. Judge Gerber in Lyondell and later Judge Sullivan in Tribune adopted a rule requiring that a plaintiff plead a "critical mass" acted with fraudulent intent or otherwise explain how actors with fraudulent intent otherwise caused the disposition of property. On appeal to the District Court, Judge Cote reversed Judge Gerber's "critical mass" test and held the actions of the CEO alone could be imputed to the entire board of directors. Here, the Defendants assert the "critical mass" test should be applied and therefore, the intentional fraudulent transfer claims must be dismissed because only two of the seven EBG board members allegedly acted with fraudulent intent. Because the Court concludes that the TAC satisfies the more stringent "critical mass" test, it need not delve into the split at the District Court level concerning the appropriate test to apply. The TAC satisfies the "critical mass" test, and by necessity Judge Cote's less stringent test for imputation to the entire board, because the Trustee has alleged how actors with fraudulent intent otherwise caused the disposition of property. Namely, the Trustee alleges that K Road: (i) was EBG's agent; (ii) had fraudulent intent based on various badges of fraud; and (iii) through manipulation, dominance, and control of EBG's operations, caused BosGen and EBG to incur debt under the Credit Facilities and thereafter, transfer the monies to EBG's members for no consideration.

Third, the Court must determine whether section 546(e)'s safe harbor provision applies to the transfers the Trustee seeks to avoid. In answering this question, the Court relies on the United States Supreme Court's recent decision in Merit and its interplay with the Second Circuit's December 2019 Tribune decision. More specifically, the Court's determination of whether section 546(e) applies to the transfers will focus on whether BosGen and EBG qualify as "financial institutions" by virtue of their agency relationship with "financial institutions" in connection with a securities contract. While also concluding that the additional requirements for safe harbor established in section 546(e) have been met, the Court holds that both BosGen and EBG qualify as "financial institutions" under the Bankruptcy Code.

Finally, the Defendants ask the Court to dismiss the TAC because the Lenders ratified the transfers at issue. In answering this question, the parties call upon the Court to address the split of authority on whether the ratification defense requires the Lenders' knowledge of the material facts related to the fraudulent transfer—namely, the fraud itself. In other words, does ratification require the Lenders' full knowledge of the Debtors' intent and financial condition, or, is it sufficient that the Lenders had mere knowledge of the transferees' identity and approved the transaction. The Court adopts the Material Facts Test and holds that for purposes of the instant motion the Lenders cannot be found to have ratified the transfers at issue because the scope of the Lenders' knowledge concerning the material facts of the Leveraged Recap Transaction is unclear.

A more fulsome discussion of the Court's holding follows.

II. Background²

Boston Generating LLC ("BosGen") and EBG Holdings LLC ("EBG"), both Delaware limited liability companies, constituted with their subsidiaries "a wholesale power generation company that own[ed] and operate[d] three electric power generating facilities located in the Boston metropolitan area." Decl. of Jeff Hunter ¶ 6, Case No. 10-14419 (Bankr. S.D.N.Y. Aug. 18, 2010), ECF No. 2 (the "Hunter Decl."). EBG was a holding company with no significant independent business operations and...