Zahn v. Yucaipa Capital Fund
| Decision Date | 24 February 1998 |
| Docket Number | C.A. No. 96-684L. |
| Citation | 218 BR 656 |
| Parties | Arnold ZAHN, as Trustee of the Almac's Creditor Litigation and Distribution Trust, Plaintiff, v. YUCAIPA CAPITAL FUND, Yucaipa Capital Advisors, Inc., Yucaipa Almac's Partners, L.P., Almac's Partners, L.P., The Yucaipa Companies, Yucaipa Companies, Yucaipa Management Company, Ronald W. Burkle, Joe S. Burkle, Mark A. Resnik, Richard d'Abo, Citicorp Securities Markets, Inc., Citicorp North America, Inc., and Citibank, N.A., Defendants. |
| Court | U.S. District Court — District of Rhode Island |
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Matthew J. McGowan, Salter, McGowan & Swartz, Inc., Providence, RI, Timothy J. Hurley, Stephen D. Lerner, Raymond W. Lembke, Timothy C. Sullivan, Taft, Stettinius & Hollister, Cincinnati, OH, for Plaintiff.
Matthew F. Medeiros, Medeiros Karmen & Sanford, Inc., Providence, RI, Robert J. Rosenberg, James E. Brandt, Latham & Watkins, New York City, for Yucaipa Defendants.
Joseph V. Cavanagh, Jr., Blish & Cavanagh, Providence, RI, R. Paul Wickes, James R. Warnot, Jr., Richard A. Lingg, Shearman & Sterling, New York City, for Citicorp Defendants.
This case arises from the leveraged buyout ("LBO"), and subsequent petition for reorganization under Chapter 11 of the United States Bankruptcy Code, of Almac's Inc. and Almac's Supermarkets, Inc. (collectively "Almac's"). By this action, Arnold Zahn, as the trustee of the Almac's Creditor Litigation and Distribution Trust (the "Trustee"), seeks to set aside transfers made to the various defendants in connection with the LBO as fraudulent under Rhode Island law.
The case is now before this Court1 on the motions of the Yucaipa Defendants2 and the Citicorp Defendants3 to dismiss pursuant to Federal Rules of Procedure 9(b) and 12(b)(6), or, in the alternative, to transfer the case to the Central District of California. Despite defendants' valiant efforts, their numerous and complex arguments are all without merit. With apologies to Shakespeare, defendants' tale is "full of sound and fury, in the end signifying nothing."4 For the reasons that follow, the motions of both the Yucaipa Defendants and the Citicorp Defendants are denied in their entirety.
The Court's prior opinion provides an extensive review of the facts in this case. See In re Almac's, 202 B.R. at 651-53. Familiarity with these facts is assumed, and their duplication here is unnecessary. The only additional fact pertinent to the present dispute is that on September 25, 1995, New Almacs Inc. (the "Purchaser"), the purchaser of Almac's assets under the Third Amended Consolidated Chapter 11 Plan of Reorganization for Almac's (the "Plan"), itself filed a petition for Chapter 11 reorganization. At the time it filed the petition, the Purchaser had not paid anything on the $3,000,000 Junior Subordinated Obligation to Almac's unsecured creditors, as referenced in the Disclosure Statement in Support of the Second Consolidated Plan of Reorganization for Almac's (the "Disclosure Statement"). See id. at 652. In addition, the Purchaser's own disclosure statement indicates that the Trustee, as claim holder for Almac's unsecured creditors under the Junior Subordinated Obligation, will receive no distribution under the Purchaser's Plan.
On April 11, 1997, both the Yucaipa Defendants and the Citicorp Defendants filed separate motions to dismiss. Both groups of defendants argued that the Trustee's Complaint should be dismissed because: (1) the Uniform Fraudulent Transfer Act ("UFTA") does not apply to transfers made in connection with an "above-board" or not otherwise intentionally fraudulent LBO, and the Complaint failed to plead the existence of such fraud; (2) the constructive fraudulent transfer provisions of UFTA § 4 are not available to creditors whose claims arose after a well-publicized LBO; (3) the Complaint failed to plead sufficiently the existence of an unpaid creditor at the time of the LBO who remained unpaid at the time of the Chapter 11 petition; (4) the Complaint failed to plead sufficiently the UFTA elements of Almac's insolvency or unreasonably small assets; (5) the transfers in connection with the LBO constituted "settlement payments" not subject to avoidance under 11 U.S.C. § 546(e); and (6) any recovery by the Trustee would constitute a prohibited "double recovery" under 11 U.S.C. § 550(d)5. The Citicorp Defendants made the additional argument that the Complaint failed to plead sufficiently the UFTA element that the transfers made to the Citicorp Defendants in connection with the LBO were for less than reasonably equivalent value.
The Yucaipa Defendants argued further that in lieu of dismissal, the case should be transferred to the United States District Court for the Central District of California.6
The Trustee vigorously contests each of the grounds for dismissal, and maintains that the case should remain in Rhode Island. The Trustee also has offered to amend the Complaint in the event that the Court finds that, as defendants argue, the pleading is insufficient.
At the hearing of defendants' motions, the Court invited further memoranda on the unresolved threshold issue of whether the Trustee had standing under the Bankruptcy Code to bring the Complaint. After hearing oral argument on the remaining issues, the Court took the matter under advisement.
On June 26, 1997, defendants filed a joint memorandum arguing that the Trustee did not have standing under 11 U.S.C. §§ 550(a) and 1123(b)(3)(B) because any recovery by the Trustee on the avoidance claims would primarily, if not exclusively, benefit the Purchaser. The Trustee rejoined that such a recovery would in fact benefit primarily the unsecured creditors, and thus his standing has been established.
The Court having considered the parties' arguments, the matter is now in order for decision.
The Court first addresses the threshold issue of the Trustee's standing under the Bankruptcy Code. The burden of proof must be carried by the party whose standing is questioned. United States v. AVX Corp., 962 F.2d 108, 114 (1st Cir.1992).
Under the Code, the bankruptcy trustee has the power during the pendency of the bankruptcy to avoid "any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim. . . ." 11 U.S.C. § 544(b). Where the trustee succeeds in an avoidance claim, he may "recover, for the benefit of the estate, the property transferred . . .", or the value of such property from the initial, immediate, or mediate transferee. 11 U.S.C. § 550(a).
The power to bring such actions is unique to the trustee (or debtor in possession) in bankruptcy, and may not be assigned. See Kroh Bros. Dev. Co. v. United Missouri Bank of Kansas City, N.A. (In re Kroh Bros. Dev. Co.), 100 B.R. 487, 499 (Bankr.W.D.Mo.1989) (citing cases) ("Kroh I"), appeal denied, 101 B.R. 1000 (W.D.Mo. 1989) ("Kroh II"). However, 11 U.S.C. § 1123(b)(3)(B) states that a Chapter 11 reorganization plan may "provide for . . . the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any . . . claim or interest" belonging to the debtor or the estate. Thus, "it is a well-settled principle that avoidance powers may be assigned to someone other than the debtor or trustee pursuant to a plan of reorganization." Winston & Strawn v. Kelly (In re Churchfield Management & Inv. Corp.), 122 B.R. 76, 81 (Bankr.N.D.Ill.1990)(citing Kroh II, 101 B.R. at 1005); see also McFarland v. Leyh (In re Texas Gen. Petroleum Corp.), 52 F.3d 1330, 1335 (5th Cir.1995)(§ 1123(b)(3)(B) "allows a plan to transfer avoidance powers to a party other than the debtor or the trustee."); Briggs v. Kent (In re Professional Inv. Properties of America), 955 F.2d 623, 626 (9th Cir.1992) (same); Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323, 1327 (10th Cir.1989) (same).
Pursuant to § 1123(b)(3)(B), a party, other than the debtor or the trustee, who seeks to prosecute avoidance claims must establish that: (1) it has been appointed; and (2) it is a representative of the estate. See, e.g., In re Texas Gen. Petroleum Corp., 52 F.3d at 1335; Retail Marketing Co. v. King (In re Mako, Inc.), 985 F.2d 1052, 1054 (10th Cir.1993); Fleet Nat'l Bank v. Doorcrafters (In re North Atlantic Millwork Corp.), 155 B.R. 271, 281 (Bankr.D.Mass.1993).
The first element does not appear to be in serious dispute in this case. "The bankruptcy court's approval of a plan that clearly appoints a stranger to the estate satisfies the first element." In re Texas Gen. Petroleum Corp., 52 F.3d at 1335. This is precisely the case here. Paragraph 8.3 of the Plan states:
On and as of the Effective Date, the Debtors will assign the Avoidance Claims against the Yucaipa Entities and the Citibank Entities arising directly, or indirectly, out of the Acquisition to the Creditor Litigation and Distribution Trustee. . . .
Clearer language could not be desired. The Plan specifically appoints this plaintiff to bring these claims. The Bankruptcy Court entered its order confirming the Plan on November 8, 1994. Thus, the first element of the § 1123(b)(3)(B) standing test is met.
The real dispute involves the second element of the test, i.e., whether the Trustee is a "representative of the estate". Courts determine whether this element is met on a case-by-case basis. See, e.g., In re Texas Gen. Petroleum Corp., 52 F.3d at 1335; In re North Atlantic Millwork Corp., 155 B.R. at 281; Temex Energy, Inc. v. Hastie and Kirschner (In re Amarex, Inc.), 96 B.R. 330, 334-35 (W.D.Okl.1989). "The primary concern is whether a successful recovery by the appointed representative would benefit the debtor's estate and particularly the unsecured creditors." In re Sweetwater, 884 F.2d at 1326-27 (...
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