Texas Court: Common Ownership Does Not Create An Affiliate Relationship
February 7, 2022, Western District of Texas – TriCounty Family Medical Care Group filed a motion to dismiss Arete Creditors Litigation Trust’s amended complaint to recover to avoid and recover alleged transfers under Sections 547, 548, and 550 and Texas state laws in the bankruptcy case of Debtor Arete Healthcare LLC. The Trust’s amended complaint pled four main causes of action: Alleged preferential & “fraudulent transfers” under the Bankruptcy Code; “Fraudulent transfers” under Texas law; Recovery of avoided transfers.
As pointed out in the opinion: TriCounty argued that the Debtor listed the causes of actions it intended to preserve in the disclosure statement but allegedly did not name TriCounty under that. TriCounty contended that since Trust did not allegedly properly preserve claims against TriCounty, it did not have the standing to pursue claims against it. The Trust asserts that it allegedly has the standing to sue post-confirmation because the plan specifically and unequivocally preserves Chapter 5 causes of action and those under Texas state law against all statutory “insiders”, including the Defendant. The Trust argues that TriCounty is an “insider” of Arete because both entities allegedly have the same principal, Brian Johnson. In the Trust’s determination, Brian Johnson’s status allegedly as a principal of both Arete and TriCounty makes the two companies affiliates, which makes the TriCounty an “insider” of Arete. The Trust alleges that the definition of an “insider” includes affiliates. TriCounty conversely contends that it cannot be an affiliate of Arete. TriCounty reasoned that it has no ownership interest in Arete and is not an officer, director, person in control, relative, or general partner of Arete. Hence, it was not an “insider” or affiliate of Arete. TriCounty also rebutted the Trust’s common principle argument by focusing on voting securities. TriCounty’s argued that if Section 101(2)(A) had meant to include limited partnerships, Congress would not have used the phrase “voting securities” because limited partnerships do not have voting securities.
The Court held that neither party is correct under the circumstances. The Court reasoned that TriCounty is wrong because none of the entities are limited partnerships; instead, all involved entities are limited liability companies. The Court further held that Trust is wrong because common ownership does not create an affiliate relationship. The Court held that the definition of affiliate focuses on who owns, controls, or holds power to vote at least 20 percent of the outstanding voting securities of the debtor, not on ownership interests in the debtor. The Court stated that the ownership interest is not synonymous with voting shares.
Next, the Court ruled that it cannot find that the Trust has the standing to sue TriCounty as an “insider” based on the facts as currently pled. The Court pointed out that the Trust has not presented the Court with any information regarding which entities have what amount of power to vote Arete’s voting securities, and hence it cannot determine whether the Trust has the standing to sue TriCounty as an “insider.” The Court further held that the Trust did not have the standing to sue TriCounty as a pre-petition creditor because TriCounty is not a creditor, and thus TriCounty could not have been put on notice through Debtor’s plan that preserved causes of action against pre-petition creditors. However, the Court finds that the Trust has the standing to sue for the two transactions listed in the statement of financial affairs because those transfers were specifically and unequivocally preserved as causes of action.
Concerning the alleged preferential payments, the Court held that the Trust’s amended complaint did not sufficiently plead multiple elements of a Section 547 preference and Section 548 and TUFTA “fraudulent transfer” and granted Defendant’s motion to dismiss this cause of action. However, the Court granted the Trust a leave to amend its complaint within 14 days of the order but denied the Trust’s request to conduct discovery.
Arete Creditors Litig. Trust v. TriCounty Fam. Med. Care Grp., LLC (In re Arete Healthcare LLC), 2022 Bankr. LEXIS 322