Download the full pdf of the opinion by clicking:here
August 03, 2022, US Bankruptcy Court for Delaware – The Delaware bankruptcy court granted in part Defendants’ motion to dismiss the fraudulent transfer claims of George L. Miller, the Chapter 7 trustee (“Trustee”) for Bayou Steel BD, LLC et al (“Debtors”). The Defendants: Black Diamond Capital Management, LLC (“BDCM”), BDCM Opportunity Fund IV, L.P. (“Fund IV”), et al., were facing a complaint alleging “fraudulent transfers”, “breach of fiduciary duty” and “corporate waste”.
In 2016, Defendants Fund IV and BDCM purchased the Debtors from Arcelor Mittal for $90.2 million. BDCM, through Fund IV, made an equity contribution of $59.6 million and the rest of the acquisition was funded by a revolving loan taken from Bank of America. The revolving loan was secured by liens on substantially all of the Debtors’ assets.
According to the complaint, after the acquisition, Debtors made a distribution of $30 million to Defendant Fund IV. BDCM allegedly provided a term loan of $36.5 million to the Debtors with a lien upon substantially all of Debtors’ properties. However, this term loan was subordinated to the Bank of America’s revolving loan. The Trustee acknowledges this term loan but contends that the Debtors allegedly had to face severe liquidity issues and a struggling business as a direct result of the 2017 distribution. The Trustee through his complaint sought to avoid the 2017 distribution and the lien grant to BDCM as alleged fraudulent transfers. The Defendants moved to dismiss the claim as time-barred under section 18-607(c) of the Delaware Uniform Fraudulent Transfer Act (“DUFTA”).
The Court found that though the fraudulent transfer claim was time-barred under DUFTA, it was filed within the limitation period suggested by section 546(a) of the Bankruptcy Code.
Fund IV and BDCM argued that section 546(a) of the Bankruptcy Code would not preempt section 18-607(c) of DUFTA because DUFTA is a statute of repose targeted at regulating the corporate affairs of business entities organized in Delaware, which is a “unique state interest”. The court cited the New Jersey bankruptcy court decision of Gibbons v. First Fid. Bank, N.A. (In re Princeton-New York Investors, Inc.), 255 B.R. 376, 2000 Bankr. LEXIS 1384, in stating that the test is to see whether the application of the state statute “present[ed] an obstacle to the objectives of Congress in enacting the Bankruptcy Code.” The Delaware bankruptcy court allowed section 546(a) to preempt section 18-607(c) of DUFTA in holding that an opposite decision would “severely restrict the trustee’s ability to recover property for the benefit of the bankruptcy estate”.
The Court found that the Trustee also failed to sufficiently allege that the Debtors did not receive reasonably equivalent value for the BDCM lien grant. While the Trustee acknowledged the capital infusions made by BDCM, the Trustee claimed that the necessity of the term loan arose from the 2017 distribution and thus was allegedly in bad faith and not at arm’s length. The Court dismissed this argument by holding that receiving the reasonably equivalent value is the only test and once satisfied, a lack of good faith or failure to transact at arms’-length cannot affect the result. The Court, therefore, considered the term loan given by BDCM as a reasonably equivalent value for the distribution made to Defendant Fund IV. Therefore, the Court dismissed the constructive fraudulent transfer claim alleged in the complaint
The Trustee also pleaded for avoidance of the BDCM lien grant as an alleged “actual fraudulent transfer”. The Trustee alleged that BDCM lien was allegedly motivated by an intention to elevate the Defendant entities over other creditors in advance of the Debtors’ bankruptcy. The Court found that though the BDCM term loan was secured by the said lien grant, the term loan was subordinated to the Bank of America revolving loan. The Court noted that the term loan exposed Fund IV and BDCF to a substantial risk of nonpayment given the loan’s subordinated nature. The Court dismissed the actual fraudulent transfer claim and allowed the Trustee to plead more facts that allow the Court to “reasonably infer actual fraud.”
Miller v. Black Diamond Cap. Mgmt., L.L.C. (In re Bayou Steel Bd Holdings, L.L.C.)
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Delaware BK Court Grants Leave to Amend Complaint For Failing to State Claims
By roland jones
rgj@rolandjones.com
Jones & Associates
Delaware BK Court Grants Leave to Amend Complaint For Failing to State Claims
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Download the full pdf of the opinion by clicking: here
August 03, 2022, US Bankruptcy Court for Delaware – The Delaware bankruptcy court granted in part Defendants’ motion to dismiss the fraudulent transfer claims of George L. Miller, the Chapter 7 trustee (“Trustee”) for Bayou Steel BD, LLC et al (“Debtors”). The Defendants: Black Diamond Capital Management, LLC (“BDCM”), BDCM Opportunity Fund IV, L.P. (“Fund IV”), et al., were facing a complaint alleging “fraudulent transfers”, “breach of fiduciary duty” and “corporate waste”.
In 2016, Defendants Fund IV and BDCM purchased the Debtors from Arcelor Mittal for $90.2 million. BDCM, through Fund IV, made an equity contribution of $59.6 million and the rest of the acquisition was funded by a revolving loan taken from Bank of America. The revolving loan was secured by liens on substantially all of the Debtors’ assets.
According to the complaint, after the acquisition, Debtors made a distribution of $30 million to Defendant Fund IV. BDCM allegedly provided a term loan of $36.5 million to the Debtors with a lien upon substantially all of Debtors’ properties. However, this term loan was subordinated to the Bank of America’s revolving loan. The Trustee acknowledges this term loan but contends that the Debtors allegedly had to face severe liquidity issues and a struggling business as a direct result of the 2017 distribution. The Trustee through his complaint sought to avoid the 2017 distribution and the lien grant to BDCM as alleged fraudulent transfers. The Defendants moved to dismiss the claim as time-barred under section 18-607(c) of the Delaware Uniform Fraudulent Transfer Act (“DUFTA”).
The Court found that though the fraudulent transfer claim was time-barred under DUFTA, it was filed within the limitation period suggested by section 546(a) of the Bankruptcy Code.
Fund IV and BDCM argued that section 546(a) of the Bankruptcy Code would not preempt section 18-607(c) of DUFTA because DUFTA is a statute of repose targeted at regulating the corporate affairs of business entities organized in Delaware, which is a “unique state interest”. The court cited the New Jersey bankruptcy court decision of Gibbons v. First Fid. Bank, N.A. (In re Princeton-New York Investors, Inc.), 255 B.R. 376, 2000 Bankr. LEXIS 1384, in stating that the test is to see whether the application of the state statute “present[ed] an obstacle to the objectives of Congress in enacting the Bankruptcy Code.” The Delaware bankruptcy court allowed section 546(a) to preempt section 18-607(c) of DUFTA in holding that an opposite decision would “severely restrict the trustee’s ability to recover property for the benefit of the bankruptcy estate”.
The Court found that the Trustee also failed to sufficiently allege that the Debtors did not receive reasonably equivalent value for the BDCM lien grant. While the Trustee acknowledged the capital infusions made by BDCM, the Trustee claimed that the necessity of the term loan arose from the 2017 distribution and thus was allegedly in bad faith and not at arm’s length. The Court dismissed this argument by holding that receiving the reasonably equivalent value is the only test and once satisfied, a lack of good faith or failure to transact at arms’-length cannot affect the result. The Court, therefore, considered the term loan given by BDCM as a reasonably equivalent value for the distribution made to Defendant Fund IV. Therefore, the Court dismissed the constructive fraudulent transfer claim alleged in the complaint
The Trustee also pleaded for avoidance of the BDCM lien grant as an alleged “actual fraudulent transfer”. The Trustee alleged that BDCM lien was allegedly motivated by an intention to elevate the Defendant entities over other creditors in advance of the Debtors’ bankruptcy. The Court found that though the BDCM term loan was secured by the said lien grant, the term loan was subordinated to the Bank of America revolving loan. The Court noted that the term loan exposed Fund IV and BDCF to a substantial risk of nonpayment given the loan’s subordinated nature. The Court dismissed the actual fraudulent transfer claim and allowed the Trustee to plead more facts that allow the Court to “reasonably infer actual fraud.”
Miller v. Black Diamond Cap. Mgmt., L.L.C. (In re Bayou Steel Bd Holdings, L.L.C.)
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