Yucaipa Am. Alliance Fund I, LP v. Ehrlich, 16-3664

Decision Date15 November 2017
Docket NumberNo. 16-3664,16-3664
PartiesYUCAIPA AMERICAN ALLIANCE FUND I, LP, a Delaware Limited Partnership; YUCAIPA AMERICAN ALLIANCE PARALLEL FUND I, LP, a Delaware Limited Partnership, Appellants v. RICHARD A. EHRLICH; STEPHEN H. DECKOFF; LESLIE A. MEIER; JEFFREY A. SCHAFFER; BDCM OPPORTUNITY FUND II, LP, A Delaware Limited Partnership; BLACK DIAMOND CLO 2005-1 LTD, a Cayman Islands Limited Liability Company; SPECTRUM INVESTMENT PARTNERS, LP, a Delaware Limited Partnership
CourtU.S. Court of Appeals — Third Circuit

NOT PRECEDENTIAL

On Appeal from the United States District Court for the District of Delaware

(D. Del. No. 1-15-cv-00373)

District Judge: Honorable Sue L. Robinson

Submitted Pursuant to Third Circuit LAR 34.1(a)

April 4, 2017

Before: CHAGARES, SCIRICA, and FISHER, Circuit Judges

OPINION*

SCIRICA, Circuit Judge

This case involves events surrounding the bankruptcies of Allied Systems Holdings, Inc. and a dispute between hedge funds who hold portions of Allied's first lien debt. Plaintiffs are two hedge funds managed by Yucaipa Companies, LLC, (collectively "Yucaipa"). Defendants are hedge funds managed by Black Diamond and Spectrum Investment Partners, and their employees (collectively "BD/S"). Yucaipa alleges BD/S engaged in a conspiracy to induce Yucaipa to take a detrimental position in Allied's bankruptcy, resulting in damages in the form of equitable subrogation of Yucaipa's first lien debt holdings by the bankruptcy court and resulting legal fees. Yucaipa asserts claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, as well as state law claims for fraud and tortious interference with business relations.

The District Court granted BD/S's motion to dismiss the RICO claims and declined to exercise supplemental jurisdiction over the remaining state law claims, and Yucaipa appealed. We will affirm.

I.
A.

The origins of this case lie in the first bankruptcy of Allied in 2007 in the United States Bankruptcy Court for the District of Delaware and a tangled web of resulting litigation. After the bankruptcy, Yucaipa became the majority shareholder of Allied under the plan of reorganization and controlled the board of directors. To finance the reorganization and emergence from bankruptcy, in May 2007, Allied borrowed $265 million of first lien debt from numerous lenders pursuant to a credit agreement. BD/Swere among the lenders, and held a minority stake in the first lien debt.

The terms of the credit agreement are essential to the present dispute. Under its terms, a lender or lenders holding 50% or more of the first lien debt can act as "requisite lenders" who have the authority to declare events of default, demand immediate payment by Allied of the balance of the loan, or commence foreclosure. As Allied's majority equity holder, Yucaipa was expressly forbidden by the terms of the credit agreement from acting as a requisite lender.

In 2008, Allied defaulted on the first lien debt and stopped making interest payments. Subsequently, Allied agreed to an amendment of the credit agreement, which gave Yucaipa the right to purchase first lien debt, but under certain restrictions, which continued to prevent Yucaipa from serving as the requisite lenders.

In February 2009, ComVest Investment Partners III, L.P., which is not a party to this suit, became the requisite lenders. Yucaipa negotiated directly with ComVest to acquire the majority of Allied's first lien debt. In addition, Yucaipa, as majority equity holder, caused Allied to enter a purported amendment to the credit agreement, which would have eliminated the restrictions on Yucaipa's ownership of Allied's first lien debt and allowed Yucaipa to become the requisite lenders. On the same day, Yucaipa declared itself the requisite lenders under the terms of the original credit agreement.

However, the proposed amendment was not approved by unanimous consent of the first lien debt lenders, as required by the original credit agreement. In January 2012, BD/S filed suit against Yucaipa in New York state court and successfully obtained a declaratory judgment that Yucaipa was not the requisite lenders because the purportedamendment to the credit agreement was void.

While the New York action was pending, in May 2012, BD/S filed involuntary petitions for bankruptcy against Allied in the United States Bankruptcy Court for the District of Delaware. In adversarial proceedings in the bankruptcy court, both Yucaipa and BD/S claimed to be the requisite lenders under the credit agreement. The bankruptcy court determined BD/S were the requisite lenders and the District Court affirmed this determination.

The bankruptcy court supervised an auction of Allied's remaining assets. Jack Cooper Holdings Corporation, which is not a party to this suit, purchased the bulk of Allied's assets. As the requisite lenders, BD/S submitted a credit bid to purchase the remainder of Allied's assets, which was approved by the bankruptcy court.

After the auction, Yucaipa filed suit in Delaware state court against BD/S and other Allied lenders to challenge the allocation of the remainder of Allied's assets. The Delaware court dismissed some of Yucaipa's claims on collateral estoppel grounds based on the prior decisions of the bankruptcy court. The remainder of the claims were stayed pending resolution of the bankruptcy.

Meanwhile, in the bankruptcy action, BD/S, as requisite lenders, sponsored a plan of reorganization, which was approved by the bankruptcy court. The plan included prosecution of claims against Yucaipa and its principals for breach of contract and breach of fiduciary duty, and sought equitable subordination of Yucaipa's first lien debt holdings. The bankruptcy action remains pending.

B.

After the reorganization plan was approved, Yucaipa filed this action in the District Court for the District of Delaware, alleging violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, conspiracy to violate RICO, and state law claims for fraud and tortious interference with business relations. Yucaipa alleges BD/S engaged in a scheme in which BD/S encouraged Yucaipa to purchase Allied's first lien debt from ComVest, then forced Allied into involuntary bankruptcy, in which BD/S caused the bankruptcy court to equitably subordinate Yucaipa's first lien debt holdings in favor of BD/S's minority stake in the first lien debt.

Yucaipa alleges the scheme began as early as 2009, when a Spectrum employee received an email from a third-party which stated "I thought you were going to check out the 'equitable subordination' angle." In addition, Yucaipa relies on an email from a Spectrum employee to a Black Diamond employee, which explained that it "looks like Yucaipa pushed the equity button here . . . you ready to roll." Yucaipa alleges these emails demonstrate a scheme, beginning in 2009, to file the involuntary petition for bankruptcy and result in the equitable subordination of Yucaipa's first lien debt.

In furtherance of this plan, Yucaipa alleges BD/S encouraged Yucaipa to purchase as much first lien debt as possible. Black Diamond's founder and principal met with Yucaipa's officers in August 2009, and allegedly provided assurances BD/S would work with Yucaipa after Yucaipa acquired ComVest's first lien debt. Yucaipa also relies on an email from February 2, 2011, in which a Black Diamond partner assured Yucaipa that "[o]n Allied, the strategy you outlined seemed right and you have our support."

In addition, Yucaipa alleges BD/S conspired to prevent Jack Cooper Holdings from purchasing Allied outright prior to the second bankruptcy, and instead encouraged the potential purchaser to wait to purchase Allied's assets following the involuntary bankruptcy. In support of this allegation, Yucaipa relies on emails between BD/S and Jack Cooper Holdings in May and December 2011.

Finally, Yucaipa alleges Black Diamond and Spectrum entered a cooperation agreement in January 2012, prior to the involuntary bankruptcy petition, in which both companies agreed to offer first refusal and participation rights to each other before transferring any Allied debt. As part of this agreement, Black Diamond agreed to transfer $4 million of its first lien debt to Spectrum for the same price Black Diamond originally paid for the debt, representing a substantial discount from market value. Because Spectrum already held enough of Allied's debt prior to the transfer to qualify as a petitioner for an involuntary bankruptcy, Yucaipa avers this transfer represented a bribe to encourage Spectrum to support Black Diamond in the resulting bankruptcy.

Yucaipa identifies the following predicate acts in support of its RICO claim:

• Yucaipa alleges the January 2012 cooperation agreement and $4 million transfer of first lien debt from Black Diamond to Spectrum constituted claims trading in relation to a bankruptcy proceeding in violation of 18 U.S.C. § 152(6).
• Yucaipa contends, in May 2012, BD/S lied in the petition for involuntary bankruptcy, as well as in various affidavits and declarations submitted to the bankruptcy court, and thus committed false oath and false declarations in relation to a bankruptcy proceeding in violation of 18 U.S.C. § 152(2)-(3).
• Yucaipa avers that various BD/S statements to the bankruptcy court in May 2012 constituted obstruction of justice in violation of 18 U.S.C. § 1503.
• Yucaipa claims several emails sent among BD/S employees constitute wire fraud in violation of 18 U.S.C. § 1343 because they "facilitated the solicitation of Allied debtholders to join the involuntary petition and . . . illegal claims trading." Specifically, Yucaipa identifies emails from September 16, 2011, October 13, 2011, and March 21, 2012.
• Yucaipa alleges Black Diamond's transfer of claims to Spectrum in May 2012 constituted mail fraud in violation of 18 U.S.C. § 1341.

As noted, Yucaipa seeks damages in the form of lost profits due to the involuntary bankruptcy and...

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