Tilton v. MBIA Inc. (In re Zohar III, Corp.)
| Decision Date | 25 March 2022 |
| Docket Number | Case No. 18-10512 (KBO) (Jointly Administered),Adv. Proc. No. 19-50390 (KBO) |
| Citation | 639 B.R. 73 |
| Parties | IN RE: ZOHAR III, CORP., et al., Debtors. Lynn Tilton, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, Octaluna, LLC, Octaluna II, LLC, and Octaluna III, LLC, Plaintiffs, v. MBIA Inc., MBIA Insurance Corporation, U.S. Bank, N.A., Alvarez & Marsal Zohar Management, Credit Value Partners, LP, Bardin Hill Investment Partners f/k/a Halcyon Capital Management LP, Coöperatieve Rabobank U.A., Värde Partners, Inc., Ascension Alpha Fund LLC, Ascension Health Master Pension Trust, CAZ Halcyon Offshore Strategic Opportunities Fund, L.P., CAZ Halcyon Strategic Opportunities Fund, L.P., Brown University, HCN LP, Halcyon Eversource Credit LLC, HLF LP, HLDR Fund I NUS LP, HLDR Fund I TE LP, HLDR Fund I UST LP, Halcyon Vallée Blanche Master Fund LP, Bardin Hill Event Driven Master Fund LP, Praetor Fund I, a Sub Fund of Praetorium Fund I ICAV, Hirtle Callaghan Total Return Offshore Fund Limited, Hirtle Callaghan Total Return Offshore Fund II Limited, Hirtle Callaghan Trading Partners, L.P., and Third Series of HDML Fund I LLC., Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
Joseph M. Barry, Ryan M. Bartley, Shane M. Reil, Young, Conaway, Stargatt & Taylor, Wilmington, DE, for Debtor.
G. David Dean, Patrick J. Reilley, Cole Schotz P.C., Wilmington, DE, for Plaintiffs Octaluna III, LLC, Octaluna, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, Lynn Tilton, ARK Angels VII, LLC, ARK II CLO 01-00001, LLC, Ark Investments Partners II, LP, Patriarch Partners Agency Services, LLC, Patriarch Partners Management Group, LLC, Patriarch Partners, LLC, Phoenix VIII, LLC.
Alexandra G. Elenowitz-Hess, Jennifer X. Luo, Vikram Shah, Michael Tremonte, Theresa Trzaskoma, Sher Tremonte LLP, New York, NY, Norman L. Pernick, Cole Schotz P.C., Wilmington, DE, for Plaintiffs Octaluna II, LLC, Octaluna III, LLC, Octaluna, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, Lynn Tilton.
Blair A. Adams, Zachary Russell, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY, for Defendant Alvarez & Marsal Zohar Management LLC.
Matthew B. Harvey, Morris Nichols Arsht & Tunnell, LLP, Wilmington, DE, for Defendants Alvarez & Marsal Zohar Management LLC, MBIA Inc., MBIA Insurance Corporation, U.S. Bank, N.A.
Joshua P. Arnold, Ingrid Bagby, Michele M. Maman, Sean O'Shea, Michael E. Petrella, Gregory M. Petrick, Cadwalader Wickersham & Taft LLP, New York, NY, Timothy P. Cairns, Laura Davis Jones, Pachulski Stang Young & Jones LLP, Wilmington, DE, for Defendants MBIA Inc., MBIA Insurance Corporation.
Deborah J. Newman, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Defendant Alvarez & Marsal Zohar Management LLC.
Jennifer V. Doran, Hinckley Allen, Boston, MA, for Defendant Brown University.
Jonathan T. Edwards, Alexander S. Lorenzo, Alston & Bird LLP, Atlanta, GA, John W. Weiss, Pashman Stein Walder Hayden, P.C., Holmdel, NJ, for Defendant U.S. Bank, N.A.
Morgan L. Patterson, Womble Bond Dickinson (US) LLP, Wilmington, DE, for Defendants Ascension Alpha Fund LLC, Ascension Health Master Pension Trust, Bardin Hill Event-Driven Master Fund LP, Bardin Hill Investment Partners, Brown University, CAZ Halcyon Offshore Strategic Opportunities Fund, L.P., CAZ Halcyon Strategic Opportunities Fund, L.P., Cooperatieve Rabobank U.A., Credit Value Partners, LP, HCN LP, HLDR Fund I NUS LP, HLDR Fund I TE LP, HLDR Fund I UST LP, HLF LP, Halcyon Eversource Credit LLC, Halcyon Vallee Blanche Master Fund LP, Hirtle Callaghan Total Return Offshore Fund II Limited, Hirtle Callaghan Total Return Offshore Fund Limited, Hirtle Callaghan Trading Partners, L.P., Praetor Fund I, Praetorium Fund I ICAV, Third Series of HDML Fund I LLC, Varde Partners, Inc.
TABLE OF CONTENTS
Plaintiffs in this adversary proceeding seek a judgment equitably subordinating each Defendant's claims, individually and in total, against the above-captioned debtors to the claims of the Plaintiffs. Each Defendant argues that the Amended Complaint should be dismissed because it fails to state a cause of action for equitable subordination. The Court agrees. The Amended Complaint fails to allege sufficient facts from which the Court can infer that the Defendants behaved inequitably.2 It will be dismissed without leave to amend.
The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1409(a).
On October 1, 2019, Plaintiffs Lynn Tilton, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC,3 Octaluna, LLC, Octaluna II, LLC, and Octaluna III, LLC4 commenced this action by filing a one count Complaint5 against the Defendants MBIA, Inc., MBIA Insurance Corporation ("MBIA Insurance" and together with MBIA, Inc., "MBIA"),6 U.S. Bank, N.A. ("US Bank"), Alvarez & Marsal Zohar Management ("AMZM"), and the Zohar III Controlling Class7 to equitably subordinate their claims against the above-captioned debtors (the "Debtors") pursuant to section 510(c) of the Bankruptcy Code.8 After obtaining permission from the Court,9 the Plaintiffs filed the Amended Complaint on January 6, 2022.10 It was later revised following the entry of an order requiring the Plaintiffs to strike certain material.11
The Defendants moved to dismiss the Amended Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure (the "Federal Rules") and Rule 7012 of the Federal Rules of Bankruptcy Procedure.12 Briefing completed on February 24, 2022.13
Oral argument occurred on March 3, 2022. The matter is ripe for adjudication.
As indicated by its title, this Section summarizes Plaintiffs’ allegations in the Amended Complaint. The Defendants disagree with many.
The Plaintiffs’ focus in this action is on MBIA. MBIA, Inc., along with its subsidiaries, operates as a financial guaranty insurer in the United States.14 MBIA Insurance, one of MBIA, Inc.’s wholly owned subsidiaries, provided financial guaranty insurance on the Class A-1 and A-2 notes issued by debtors Zohar CDO 2003-1, Limited ("Zohar I") and Zohar II 2005-1, Limited ("Zohar II").15 Ultimately, Zohar I and Zohar II defaulted on their obligations to the noteholders, in 2015 and 2017. MBIA paid a total of approximately $919 million to the insured Class A noteholders.16 In 2019, debtor Zohar III, Limited ("Zohar III") also defaulted on its obligations to, among others, the noteholders comprised of the Zohar III Controlling Class.
The Plaintiffs contend that MBIA, with the assistance and support of US Bank, AMZM, and the Zohar III Controlling Class, took control of the Debtors and perpetrated a years’ long scheme to take away from the Plaintiffs over a billion dollars of their equity holdings in a variety of distressed companies that were accumulated through transactions involving the Zohar Funds and their financial investments. MBIA's behavior was allegedly motivated by a need to rescue itself from the brink of financial ruin caused by an overwhelming amount of insurance guaranty obligations that arose as a result of the financial crises beginning in 2007.17 When faced with the prospect of rehabilitation or liquidation proceedings, Plaintiffs allege that MBIA developed and pursued the alleged scheme for approximately ten years, continuing into these cases.18
The Zohar Funds19 are a type of investment vehicle referred to as a "collateralized loan obligation."20 They obtained funds from several classes of noteholder-investors and pursued an investment strategy developed by Ms. Tilton in which the investor funds were used to purchase a portfolio of distressed senior secured loans at a discount and to originate loans with high interest rates to distressed companies (the "Portfolio Companies") in exchange for promises to repay and for equity in the Portfolio Companies.21 Each Zohar transaction was governed by a heavily negotiated Indenture, Collateral Management Agreement ("CMA"), and Collateral Administration Agreement ("CAA").22
While it was acknowledged that some loans may...
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