Yucaipa Am. Alliance Fund I, LP v. Sbdre LLC, C.A. No. 9151 - VCP
| Decision Date | 31 October 2014 |
| Docket Number | C.A. No. 9151 - VCP |
| Parties | Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I, LP, Plaintiffs, v. SBDRE LLC, Black Diamond Commercial Finance L.L.C., Spectrum Commercial Finance L.L.C., BDCM Opportunity Fund II, LP, Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P., Defendants. |
| Court | Court of Chancery of Delaware |
Martin S. Lessner, Esq., Michael R. Nestor, Esq., Emily V. Burton, Esq., Matthew C. Bloom, Esq., YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Adam G. Landis, Esq., Rebecca L. Butcher, Esq., K. Tyler O'Connell, Esq., LANDIS RATH & COBB LLP, Wilmington, Delaware; Adam C. Harris, Esq., Robert J. Ward, Esq., David M. Hillman, Esq., SCHULTE ROTH & ZABEL LLP, New York, New York; Attorneys for Defendants.
This case involves a dispute among the major lenders to a now-bankrupt company known as Allied Systems Holdings, Inc. Resolving the parties' competing positions requires navigating a maze of relevant documents: a senior credit agreement, the third amendment to that credit agreement, the related security agreement, and the limited liability company agreement of SBDRE LLC, a Delaware limited liability company ("LLC") formed by the defendant Black Diamond to acquire and realize upon the lenders' collateral.
The Court of Chancery is at least the sixth court to become involved in this controversy. An opening skirmish between the plaintiffs and a non-party to this case seeking a declaratory judgment about the validity of a purported fourth amendment to the credit agreement dragged on for two years in Georgia before those parties settled. Then, litigation in New York between the parties currently before me resulted in an opinion invalidating the same disputed fourth amendment. The Appellate Division of New York's Supreme Court affirmed that holding and the New York Court of Appeals denied further review. Meanwhile, parallel litigation moved forward in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). That litigation continues. An appeal from a significant decision of the Bankruptcy Court currently is pending before the United States District Court for the District of Delaware (the "District Court"). Amidst all of this litigation, the parties also attempted unsuccessfully to mediate their dispute.
In this case, the plaintiffs initially sought a status quo order. I denied the motion for a status quo order on December 20, 2013. This action is currently before me onDefendants' motion to dismiss or stay the complaint. For the reasons that follow, I conclude that a covenant not to sue in the third amendment to the credit agreement bars the plaintiffs from bringing several of the fourteen counts asserted in the complaint and portions of other counts. As for the claims that have survived the motion to dismiss in whole or in part, I find that resolution of those claims should be stayed pending completion of the litigation in the Bankruptcy Court.
Allied Systems Holdings, Inc. ("Allied") operated a car-hauling and car-delivery business. Allied is currently in bankruptcy proceedings. The dispute in this case revolves around Allied's debt.
Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I, LP (together, "Plaintiffs" or "Yucaipa") are investment funds. Plaintiffs held a majority equity interest in Allied when it entered bankruptcy. Before the bankruptcy, Yucaipa also had purchased a majority of the relevant Allied debt.
Defendants BDCM Opportunity Fund II, LP, Black Diamond CLO 2005-1 LTD, and Spectrum Investment Partners, L.P. (together, "Black Diamond") are also investment funds. Black Diamond owns a significant amount of the relevant Allied debt.
Defendant Black Diamond Commercial Finance L.L.C. and Spectrum Commercial Finance, LLC (together, the "Black Diamond Agents") are entities created by Black Diamond to serve important roles under the credit agreement governing the Allied debt.
Defendant SBDRE LLC ("SBDRE") is a Delaware LLC created by Black Diamond to realize upon assets acquired from the Allied estate following a successful credit bid.
Black Diamond, the Black Diamond Agents, and SBDRE collectively comprise the "Defendants" in this case.
Allied emerged from its first bankruptcy in May 2007. Under the plan of reorganization, Yucaipa became the controlling stockholder. Yucaipa held no Allied debt at that time. Allied had a $265 million senior secured priority credit facility (the "Allied Debt") from a collection of lenders (the "Lenders"). The Allied Debt is governed by the Amended and Restated First Lien Secured Super-Priority Debtor in Possession and Exit Credit and Guaranty Agreement (the "Credit Agreement") and the related Amended and Restated Pledge and Security Agreement (First Lien) (the "Security Agreement").
As defined in the Credit Agreement, one or more Lenders holding more than 50% of the total Allied Debt can act as the "Requisite Lender." The Requisite Lender has the authority, in the event of a default by Allied, either to exercise the Lenders' rights or to cause the Lenders to forbear from exercising their rights under the Credit Agreement. Basically, this case is about Yucaipa's thwarted attempt to become the Requisite Lender. Under the Credit Agreement, however, Yucaipa was not an "Eligible Assignee"—one towhom the Lenders could assign their debt—and, therefore, Yucaipa could not become a Lender, much less the Requisite Lender.
After two amendments of no importance here, a majority of the Lenders agreed to Amendment No. 3 to Credit Agreement and Consent (the "Third Amendment") on April 17, 2008. The Third Amendment allowed Yucaipa to acquire some Allied Debt from the other Lenders. But, the Third Amendment imposed onerous restrictions on Yucaipa, such as limiting it to acquiring no more than 25% of the term loan debt—one of three kinds of debt recognized under the Credit Agreement—requiring Yucaipa to make capital contributions to Allied in proportion to the debt it acquired, stripping any Yucaipa-held debt of voting rights, and subjecting Yucaipa to a broadly-worded covenant not to sue. Indeed, under the Third Amendment, Yucaipa assumed the unique status of a "Restricted Sponsor Affiliate" and was not permitted to become a Lender. Given the 25% cap on the amount of Allied Debt Yucaipa could acquire, it also could not become Requisite Lender under the Third Amendment.
In February 2009, ComVest Investment Partners III, L.P. ("ComVest") acquired roughly 55% of the Allied Debt. Later that year, a majority of the Lenders approved a fourth amendment to the Credit Agreement (the "Fourth Amendment"). The Fourth Amendment lifted all restrictions on Yucaipa's acquisition of Allied Debt. Following approval of the Fourth Amendment, Yucaipa purchased ComVest's lending position, thereby acquiring 55.2% of the Allied Debt. The Complaint alleges that on August 21, 2009, Yucaipa became the Requisite Lender. As such, Yucaipa purportedly gained the ability to cause the Lenders to forbear from exercising their rights in the event of adefault by Allied. Given Allied's struggles following its exit from its first bankruptcy, Yucaipa apparently saw this as a valuable power. Nonetheless, in May 2012, Black Diamond filed an involuntary petition for bankruptcy against Allied in the Bankruptcy Court, and Allied entered bankruptcy a second time only five years after its first bankruptcy. The second bankruptcy proceeding is still pending.
Unfortunately for Yucaipa, the New York courts declared the Fourth Amendment void. That ruling had an important impact on the current bankruptcy litigation. The Bankruptcy Court declared Black Diamond the Requisite Lender. Thereafter, the vast majority of Allied's assets were sold to Jack Cooper Holdings Corp. (the "Jack Cooper Sale"). That sale closed on December 20, 2013, and was funded on December 27, 2013. While the Jack Cooper Sale was in the works, Black Diamond, acting as Requisite Lender, made a credit bid (the "Credit Bid") for the remaining assets of Allied (the "Assets"). On September 17, 2013, the Bankruptcy Court approved the Credit Bid.
In that context, the Black Diamond Agents formed SBDRE on August 20, 2013, to receive and hold the Assets that the Lenders anticipated acquiring from the Credit Bid. One part of the dispute currently before this Court involves the relationship between the Amended and Restated Limited Liability Company Agreement of SBDRE LLC (the "LLC Agreement") and the Credit Agreement. After the formation of SBDRE, on November 8, 2013, Black Diamond circulated a memorandum (the "Memo") to the Lenders. The Memo disclosed that the Black Diamond Agents, who were named in the LLC Agreement as the managing members of SBDRE, would hold the Lenders' pro rata Class A Membership Interests in SBDRE for the benefit of the Lenders.
More importantly, the Memo described the contemplated issuance of new membership interests in SBDRE (the "New Issuance"). Following the New Issuance, SBDRE would have Class B and Class C Membership Interests. SBDRE issued $10 million in new Class B Membership Interests that were to receive 66.6% of the voting rights in and rights to distributions from SBDRE. The Lenders were allowed to buy up to their pro rata share of Class B Membership Interests if they subscribed to the New Issuance by November 15, 2013, one week after the Memo was circulated. Thus, for example: a Lender holding 10% of the Allied Debt would have a 10% Class A Membership Interest and had the opportunity during the New Issuance to purchase up to 10% of the Class B Member Interests for $1 million. In exchange for backstopping the New Issuance, Black Diamond granted itself all of the new Class C Membership Interests, which represented 3% of the aggregate Membership Interests in SBDRE.
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