Whyte v. Barclays Bank PLC

• Decision Date: 11 June 2013
• Docket Number: No. 12 Civ. 5318(JSR).,12 Civ. 5318(JSR).
• Parties: Bettina M. WHYTE, as Trustee of the SemGroup Litigation Trust, Plaintiff, v. BARCLAYS BANK PLC, and Barclays Capital, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

494 B.R. 196

Bettina M. WHYTE, as Trustee of the SemGroup Litigation Trust, Plaintiff,

v.BARCLAYS BANK PLC, and Barclays Capital, Inc., Defendants.

No. 12 Civ. 5318(JSR).

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

June 11, 2013.

Jeffrey Eric Gross, Phillip Jason Collins, Rachel Susan Fleishman, William Thomas Reid, Reid Collins & Tsai LLP, New York, NY, Joshua J. Bruckerhoff, Nathaniel J. Palmer, Reid Collins & Tsai LLP, Austin, TX, for Plaintiff.

Jeffrey T. Scott, Joshua John Fritsch, Meredith Jane Williams, Robinson Burrell Lacy, Sullivan and Cromwell, LLP, New York, NY, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

Plaintiff Bettina M. Whyte, acting in her capacity as the trustee of the SemGroup Litigation Trust (the “Trustee”), brings the above-captioned case seeking to avoid certain transactions between several SemGroup entities ¹ and defendants Barclays Bank PLC and Barclays Capital, Inc. (collectively, “Barclays”). On August 22, 2012, the defendants moved this Court to dismiss the Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. In response to the Rule 12(b)(1) prong of the motion, the Court permitted the plaintiff to amend her complaint, in the process of which she cured any jurisdictional defect by adequately pleading diversity of citizenship. Following that amendment, Barclays conceded that the Court possessed jurisdiction and renewed its motion to dismiss the amended complaint under Rule 12(b)(6) for failure to state a claim. See Supp. Mem. of Law in Supp. Of Defs.' Mot. to Dismiss at 5. On November 7, 2012, after full consideration of the parties' briefs and oral arguments, the Court, by “bottom-line” Order, granted the defendants' motion to dismiss. This Memorandum Order explains that ruling and directs the entry of final judgment.

For the purposes of a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded factual allegations in the Complaint and draws all reasonable inferences in favor of the plaintiff. Litwin v. Blackstone Group, L.P., 634 F.3d 706, 715 (2d Cir.2011). According to the amended complaint, SemGroup was a large energy transport and storage company that filed for bankruptcy on July 22, 2008. Prior thereto, on June 15, 2008, Barclays and SemGroup entered into an agreement (the “novation”), by which, in return for approximately $143 million, Barclays acquired SemGroup's portfolio of commodities derivatives traded on the New York Mercantile Exchange (“NYMEX”). That portfolio has since become profitable. See Am. Compl. ¶¶ 45–46, 65, 87.

On October 28, 2009, the United States Bankruptcy Court for the District of Delaware confirmed a plan (the “Plan”) pursuant to Chapter 11 of the Bankruptcy Code, by which there was established a SemGroup Litigation Trust (the “Trust”) empowered to liquidate certain of SemGroup's assets and to prosecute certain claims relating to the SemGroup bankruptcy. Specifically, by the terms of the agreement creating the Trust, certain creditors (so-called “contributing lenders”) and the relevant debtors and debtors' estates putatively assigned “any and all” of their claims to the Trust.² The Trust was in turn empowered to bring any claim or cause of action transferred to it, including avoidance actions arising under Chapter 5 of the Bankruptcy Code and state law causes of action otherwise available to the debtors who transferred their claims to the Trust. See Am. Compl. ¶ 15; Fourth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the Bankruptcy Code of the bankruptcy estates of SemGroup, Decl. of Joshua Fritsch (“Fritsch Decl.”), Ex. A, at §§ 1.7, 1.83, 11.1–11.6.³See also In re Appleseed's Intermediate Holdings, LLC, 470 B.R. 289 (D.Del.2012) (applying the 546(e) safe harbor for settlement payments to a fraudulent conveyance action brought by a litigation trustee pursuant to section 544 and applicable state laws); In re DBSI, Inc., 477 B.R. 504 (Bankr.D.Del.2012) (same).

In this action, the Trustee seeks to avoid the novation of SemGroup's NYMEX portfolio on the ground that the transaction with Barclays was a fraudulent conveyance, not under the Bankruptcy Code, but as defined by various provisions of New York's Debtor–Creditor Law (“NYDCL”).

At the outset, it is important to note that the Trustee is not seeking to avoid the novation under section 544 (or any other section) of the Bankruptcy Code. Of course, the two-year post-filing period for seeking to avoid a transaction under other sections of the Code has long since passed; but section 544, might, in the ordinary case, empower the Trustee to assert a state-law fraudulent conveyance action, which, in the case of New York state law, would extend the statute of limitations to six years. But section 544 is subject to several limitations, of which the one relevant here is the provision of section 546(g), which deprives a bankruptcy trustee of the power to bring avoidance actions otherwise given to her by the Code where she seeks to avoid “a transfer, made by or to (or for the benefit of) a swap participant or financial participant, under or in connection with any swap agreement and that is made before the commencement of the case.” ⁴ The Code's definition of swap agreements is “extremely broad, covering several dozen enumerated contracts and transactions, as well as combinations of them, options on them, and similar contracts or transactions.” In re Nat'l Gas Distribs., LLC, 556 F.3d 247, 253 (4th Cir.2009). Barclays contends, and the Trustee does not dispute, that the novation qualifies as a “swap” transaction benefiting from the safe harbor of section 546(g).

Accordingly, the Trustee seeks to here invoke, not her powers under the Bankruptcy Code, but her rights under state law as “holder and assignee of all claims and causes of action against Barclays.” Am. Compl. at 2.⁵ The Trustee's argument begins with the uncontroversial assertion that despite the legal fiction of section 544, avoidance claims remain property of creditors during bankruptcy. Since, the Trustee argues, section 546(g) applies only to “an estate representative who is exercising federal avoidance powers under [ section 544 of] the Bankruptcy Code,” section 546(g) should not apply to “claims asserted by creditors” after the bankruptcy concludes without a release of such claims. Pl.'s Mem. of L. in Opp. to Def.'s Motion to Dismiss (“Pl.'s Mem.”) at 19–20. Since the Plan caused the assignment of the relevant creditors' claims to Whyte as the trustee of the SemGroup litigation trust, Whyte argues that she need not assert these claims as the trustee of a bankruptcy estate and section 546(g) is thus irrelevant.

The trouble with this clever argument is that it would, in effect, render section 546(g) a nullity. But such an absurd result is here avoided, because under well-established principles of federal preemption, section 546(g) impliedly preempts the Trustee's attempt to resuscitate fraudulent avoidance claims as the assignee of certain creditors where, as here, she would be expressly prohibited by section 546(g) from asserting those claims as assignee of the debtor-in-possession's rights (or, indeed, as the functional equivalent of a bankruptcy trustee).

Implicit preemption takes two forms: “(1) field preemption, where Congress has manifested an intent to ‘occupy the field’ in a certain area ...; and (2) conflict preemption,where state law ‘actually conflicts with federal law.’ ” Id. Barclays's asserts the latter theory of implied preemption, under which it must show either that (i) “compliance with both federal and state regulations is a physical impossibility,” (ii) that “state law is an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” or (iii) that “federal law is in ‘irreconcilable conflict’ with state law.” Mary Jo C. v. N.Y. State and Local Retirement Sys., 707 F.3d 144, 162 (2d Cir.2013).⁶

Although both the second and third tests may well be met here, the Court finds it necessary only to discuss the second, for permitting a trustee that is the creature of a Chapter 11 plan to avoid a “swap transaction” by way of a state fraudulent conveyance action would stand as a major obstacle to the purposes and objectives of Congress in passing, and then expanding, the 546(g) “safe harbor.”

The obvious purpose of section 546(g), fully confirmed by the legislative history, is to protect securities markets from the disruptive effects that unwinding such transactions would inevitably create. Beginning in 1982, Congress, “concerned about the volatile nature of the commodities and securities markets,” amended the Bankruptcy Code by adding section 546(e) so as to protect margin and settlement payments against avoidance actions in order “to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.” Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846, 849 (10th Cir.1990). In 1990, Congress further amended section 546 by adding subsection (g), so as “to ensure that the swap and forward contract financial markets are not destabilized by uncertainties regarding the treatment of their financial instruments under the Bankruptcy Code” and to minimize volatility in swap markets. See Act of June 25, 1990, H.R. Rep. 101–484, at 3, available at 1990 WL 92539 (1990). And in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109–8, 119 Stat. 23 (2005), further amended the Bankruptcy Code to make even more complete the protection of participants in swap transactions and swap agreements by introducing an “extremely broad” definition of swap agreements in order to “protect[ ] all counterparties to these agreements.” In re Nat'l Gas Distribs., 556 F.3d at 253 (emphasis in original). Both the facial breadth of these provisions, and the corresponding legislative history, make plain that ...