Liquidation Trusts

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In a suit by the trustee of the liquidation trust of Green Field Energy Services, a defunct oil services business, against the debtor’s former CEO and others, the U.S. Bankruptcy Court for the District of Delaware found that the trustee can recover almost $17 million.  See Halperin v. Moreno, et al. (In re Green Field Energy Services, Inc.), Bankr. D. Del. Adv. No. 15-50262(KG), D.I. 535.

Oil PlantIn a 126-page decision, Judge Kevin Gross found that the former CEO had caused entities he controlled to fail to make required payments under two Share Purchase Agreements (the “SPAs”) that resulted in damages to the debtor in the amount of $16.6 million (inclusive of prejudgment interest).  In particular, the SPAs required that entities controlled by the CEO make quarterly purchases of preferred stock.  Although the CEO was not a party to these SPAs, the trustee brought related claims against him for the entities’ failures to perform.

In the face of these contractual obligations for quarterly share purchases, and despite that the CEO / his entities had cash on hand to make the required payments, the Court found that the former CEO caused his controlled entities to fail to make the required purchases / payments which deprived the Debtor of much needed cash.  These failures eventually led to Green Field’s defaults on secured loans and resulted in its bankruptcy filing.  The Court found that the CEO had diverted funds that could be used for the share purchases.

Ultimately, the Court found that the entities controlled by the CEO had breached the SPAs and were liable for contract damages.  Further, the Court found that the former CEO “intentional and tortuously interfered with the obligations” under the SPAs.  Id. at 125.  Although the opinion is long, and a lot to take in, one thing is clear — preservation of litigation claims in liquidating or litigation trusts after plan confirmation remains a valuable asset and can substantially increase the recovery for unsecured creditors.  Read our prior blogs on Liquidation Trusts here.

 

Michael Temin writes:

Fiber optical network cableWhen deciding a motion to dismiss a complaint pursuant to Federal R. Bankr. 7008, which incorporates Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and construe all inferences from those allegations in favor of a plaintiff.  It was, therefore, unusual when a Michigan bankruptcy court dismissed a complaint alleging breach of fiduciary duty against a director based upon an affirmative defense.  The case is In re Great Lakes Comnet, Inc., 586 B.R. 718 (Bankr. W.D. Mich. 2018).

The debtor provided fiber optic telecommunication services to third party carriers.  The officers of the debtor schemed to charge national exchange carriers with illegal tariffs.  Six years after the scheme began the debtor filed for bankruptcy under chapter 11.  The liquidation trust formed pursuant to the plan of liquidation sued the officers and directors for breach of their fiduciary duties to the debtor.

One director moved to dismiss the breach of fiduciary duty claim as to him, arguing, inter alia, that the officers’ conduct as alleged in the complaint and supplemented by certain board meeting minutes, provided a defense to the claim.  The director attached to his motion, and relied on, minutes from board meetings and an annual shareholder meeting.  The bankruptcy court took the substance of the minutes under consideration, explaining:

The Complaint specifically refers to board meeting minutes and information provided by the officers to the board during those meetings.  All of the meeting minutes directly relate to the cause of action against [the director] for breach of fiduciary duty and are integral to the allegations in the Complaint.  Given the lack of objection and both parties’ reliance on these documents at the hearing, the court shall consider them in connection with the Motion.

The bankruptcy court further acknowledged:

Because a defendant has the burden of proof of demonstrating an affirmative defense, it is generally more appropriately considered after the pleadings stage. [citations omitted]. However, the Sixth Circuit has explained that a motion to dismiss may be granted on the basis of a meritorious affirmative defense if the facts in the complaint conclusively establish the existence of the defense as a matter of law.

The court held that the Trustee’s allegations in the complaint, as supplemented by the meeting minutes, demonstrate the affirmative defense of reasonable reliance under Michigan law.  Based upon the foregoing, the bankruptcy court granted the motion to dismiss as to the moving defendant.

Read the full opinion here.

Michael L. Temin is senior counsel in Fox’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.