Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.)
| Decision Date | 29 January 2019 |
| Docket Number | Case No. 09-50026 (MG) (Jointly Administered),Adversary Proceeding Case No. 09-00504 (MG) |
| Citation | 596 B.R. 774 |
| Parties | IN RE: MOTORS LIQUIDATION COMPANY, f/k/a General Motors Corporation, et al., Debtors. Motors Liquidation Company Avoidance Action Trust, by and Through the Wilmington Trust Company, Solely in Its Capacity as Trust Administrator and Trustee, Plaintiff, v. JPMorgan Chase Bank, N.A., et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
BINDER & SCHWARTZ LLP, Attorneys for Plaintiff, 28 W. 44th Street, Suite 700, New York, New York 10036-4039, By: Eric B. Fisher, Esq., Neil S. Binder, Esq., Lindsay A. Bush, Esq., Lauren K. Handelsman, Esq.
WACHTELL, LIPTON, ROSEN & KATZ, Attorneys for Defendant JPMorgan Chase, Bank, N.A., 51 West 52nd Street, New York, New York 10019, By: Harold S. Novikoff, Esq., Marc Wolinsky, Esq., Amy R. Wolf, Esq.
KELLEY DRYE & WARREN LLP, Attorneys for Defendant JPMorgan Chase, Bank, N.A., 101 Park Avenue, New York, New York 10178, By: John M. Callagy, Esq., Nicholas J. Panarella, Esq., Martin A. Krolewski, Esq.
JONES DAY, Attorneys for Defendant JPMorgan Chase, Bank, N.A., 250 Vesey Street, New York, New York 10281, By: C. Lee Wilson, Esq., and, 555 South Flower Street, 50th Floor, Los Angeles, California 90071, By: Bruce Bennett, Esq., Erin L. Burke, Esq., and, 51 Louisiana Avenue, N.W. Washington, D.C. 20001, By: Gregory M. Shumaker, Esq., Christopher J. DiPompeo, Esq.
DAVIS POLK & WARDWELL LLP, Attorneys for Certain Term Loan Lender Defendants identified on Exhibit 1 to Adv. Pro. Docket, No. 788, 450 Lexington Avenue, New York, New York 10017, By: Elliot Moskowitz, Esq., Marc J. Tobak, Esq., M. Nick Sage, Esq.
KASOWITZ BENSON TORRES LLP, Attorneys for the Ad Hoc Group of Term Loan Lenders listed in Appendix A to Adv. Pro. Docket, No. 670, 1633 Broadway, New York, New York 10019, By: Andrew K. Glenn, Esq., Joshua N. Paul, Esq., Michelle G. Bernstein, Esq., Frank S. DiCarlo, Esq.
MUNGER, TOLLES & OLSON LLP, Attorneys for the Term Loan Lenders Listed on Appendix A to Adv. Pro. Docket No. 241, 350 South Grand Avenue, 50th Floor, Los Angeles, California 90071, By: John W. Spiegel, Esq., Matthew A. Macdonald, Esq., Bradley R. Schneider, Esq., and, 560 Mission Street, 27th Floor, San Francisco, California 94105, By: Nicholas D. Fram, Esq.
HAHN & HESSEN LLP, Attorneys for Certain Term Loan Investor, Defendants identified on Exhibit 1 to, Adv. Pro. Docket No. 788, 488 Madison Avenue, New York, New York 10022, By: Mark T. Power, Esq, Alison M. Ladd, Esq.
ELENIUS FROST & WALSH, Attorneys for Continental Casualty Co., 333 S. Wabash Avenue, 25th Floor, Chicago, Illinois 60604, By: Daniel M. Hinkle, Esq.
At the time General Motors Corporation ("Old GM") filed for bankruptcy on June 1, 2009, it was believed that the defendants in this action, JPMorgan Chase Bank, N.A. (the agent bank and a term lender) and various other financial institutions (collectively, the "Term Lenders") held a fully secured claim. Shortly thereafter, it was discovered that a UCC-3 termination statement ("2008 Termination Statement") purporting to terminate the main lien securing the Term Lenders' loan (the "Term Loan") had been filed by mistake in 2008. While this created uncertainty with respect to the Term Lenders' position, all parties involved understood the urgency of restructuring Old GM. Faced with a serious risk that the Term Lenders could hold up completion of a section 363 sale of substantially all of Old GM's assets, the parties agreed to a Final DIP Order by which the United States and Canadian Governments provided over $ 33 billion in DIP financing to facilitate a section 363 sale and the ongoing chapter 11 cases. (The "Final DIP Order," Case No. 09-50026, ECF Doc. # 2529) The terms of the order authorized Old GM to repay the Term Lenders in full, but it also preserved the right of the Official Committee of Unsecured Creditors of Old GM (the "Committee") to challenge the loan repayment after the fact and to recover all or part of that repayment for the benefit of the estate. The section 363 sale was successfully completed, and Old GM was able to confirm a chapter 11 plan and emerge from bankruptcy.
On July 31, 2009, the Committee filed a complaint initiating this adversary proceeding (the "Original Complaint") against the Term Lenders, alleging that the 2008 Termination Statement caused the main lien on the collateral to become unperfected and seeking to avoid the transfer to the Term Lenders authorized by the Final DIP Order. (ECF Doc. # 1 ¶¶ 433, 440 and 449.) The Motors Liquidation Company Avoidance Action Trust (the "AAT"), as successor to the Committee, litigated the question of whether the 2008 Termination Statement terminated the main lien. In re Motors Liquidation Co. , 777 F.3d 100 (2d Cir. 2015). On January 21, 2015, the Second Circuit held that, because of the filing of the 2008 Termination Statement, the main lien was not effective as of the Petition Date and remanded the case to the Bankruptcy Court to determine the extent to which the Term Lenders were secured parties absent the main lien (the "Phase I Decision"). Id. at 105. The AAT amended the Original Complaint on May 20, 2015. (ECF Doc. # 91.)
The Term Lenders argue that the so-called "earmarking doctrine" provides a complete defense to the AAT's claim. The AAT now moves the Court for partial summary judgment dismissing the Term Lenders' earmarking defense.
The earmarking doctrine is a judge-made equitable doctrine that does not appear in the Bankruptcy Code. The doctrine protects a transfer from avoidance where a debtor receives funds subject to a clear obligation to use the money to pay off a preexisting debt, the funds are in fact used for that purpose, and the transfer does not diminish the debtor's estate. If these elements are proven, the funds do not become part of the debtor's estate and the transfer cannot be avoided in bankruptcy. In the usual circumstance where an earmarking defense is recognized, one debt is substituted for another with the same priority, and, therefore, no other creditors are worse off.
For the reasons explained below, the Court concludes that the defense is not available in this case. The DIP financing was not subject to a clear obligation to use the money to pay the Term Lenders. While the DIP Order authorized the repayment to the Term Lenders, it was expressly subject to challenge and recovery based on the extent, validity and priority of the liens securing the Term Loan. Furthermore, the repayment to the Term Lenders diminished Old GM's estate. Accordingly, partial summary judgment is awarded to the AAT and the Term Lenders' earmarking defense is dismissed as a matter of law.
On June 1, 2009, Old GM and certain of its subsidiaries filed voluntary Chapter 11 petitions in this Court. (The "Term Lenders' Counterstatement of Facts," ECF Doc. # 1143-3, at 4.) On the same day, Old GM filed a motion seeking authority to obtain over $ 33 billion in postpetition DIP financing from the U.S. and Canadian governments. (Id. ) The motion requested authority to use a portion of the DIP financing to repay the Term Loan in full. (Id. )
On June 3, 2009, Old GM entered into the Debtor in Possession Credit Agreement (the "DIP Credit Agreement," Case No. 09-50026, ECF Doc. # 2529-1). (Id. at 5.) The DIP Credit Agreement provided that the proceeds of the DIP financing shall be:
used to finance working capital needs, capital expenditures, the payment of warranty claims and other general corporate purposes of the North American Group Members, including the payment of expenses associated with the administration of the Cases, in each case, subject to Section 6.21, and in the case of the Tranche C Term Loans, the Wind-Down; provided that, the North American Group Members may not prepay Indebtedness (other than the Canadian Facility in accordance with this Agreement) without the prior written consent of the Required Lenders.
(Id. ) Further, the DIP Credit Agreement provided that the borrowers "are the ultimate beneficiaries of this Agreement and the Loans to be received hereunder." (Id. at 7.)
Also, on June 3, 2009, the Office of the United States Trustee appointed the Committee pursuant to section 1102 of the Bankruptcy Code. (Id. at 5.) Shortly thereafter, JPMorgan Chase Bank, N.A. ("JPMorgan"), the administrative agent for the Term Loan, informed the Committee that an erroneous UCC-3 termination statement relating to the Term Loan's main lien had been filed in 2008. This called into question whether the main lien remained perfected. (Id. at 12.)
On June 25, 2009, the Court entered the Final DIP Order, approving the DIP financing. (Id. at 13.) On June 30, 2009, Old GM paid $ 1,481,656,507.70 to the Term Lenders in full satisfaction of all claims arising under the Term Loan Agreement. (Id. at 14.) As explained below, however, the Final DIP Order gave the Committee and now the AAT the right to seek to claw back all or part of the Term Loan repayment if the Court determined that the Term Lenders were undersecured. A month after repayment of the Term Loan, the Committee filed a complaint in this action seeking to avoid the payment to the Term Lenders pursuant to section 549. (ECF Doc. # 1.) After the Committee dissolved, prosecution of this action was transferred to the AAT. (Term Lenders' Counterstatement of Facts, at 15.)
Federal Rule of Civil Procedure 56, applied in bankruptcy court under Federal Rule of Bankruptcy Procedure 7056, sets forth the standards for granting summary judgment. These standards were recently explained by the district court in Thomas v. River Greene Constr. Grp. LLC , No. 17 CIV. 6954 (PAE), 2018 WL 6528493, at *3–4 (S.D.N.Y. Dec. 11, 2018) :
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