Bettina M. Whyte, as the Trustee, on behalf of the v. Ritchie SG Holdings L.L.C.
10-50840
Bankr. D. Del.Sep 30, 2014Background
- SemGroup, a midstream energy company, made two large equity distributions to Ritchie (approx. $22.9M in Aug 2007 and $25.4M in Feb 2008). Appellant (SemGroup Litigation Trust) sought to avoid them as constructively fraudulent transfers.
- Claim 1: distributions left SemGroup with "unreasonably small capital." Claim 2: SemGroup was insolvent at the time of the 2008 distribution.
- SemGroup relied on a substantial syndicated credit facility (led by Bank of America) from 2005 through July 2008; borrowing grew from ~$800M to >$1.7B due to margin requirements on options trading.
- SemGroup sold "naked" options and made unsecured, interest-free advances to Westback (payments to a company owned by the CEO and spouse). There was no allegation of concealment or fraud.
- The Bank Group declared default and SemGroup filed bankruptcy in July 2008. The bankruptcy court granted summary judgment rejecting the unreasonably-small-capital claim and, after trial, rejected the insolvency claim; the district court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether distributions left SemGroup with "unreasonably small capital" | SemGroup's breach of the Credit Agreement (and foreseeable lender reaction) made loss of credit and business failure reasonably foreseeable, so capital was unreasonably small | SemGroup had a substantial credit line at the time; forecasting lenders' reaction and foreclosure is speculative; availability of credit must be considered | Court affirmed summary judgment for defendants — plaintiff's forecasting of lenders' reaction was too speculative and insufficient under Moody test |
| Whether SemGroup was insolvent at time of 2008 distribution | SemGroup was insolvent (plaintiff's expert using Asset Approach and treating Westback advances as unrecoverable) | Defendants' expert used Income Approach (preferred for going concern), relied on market valuation adjustments and novation cost estimates to show a substantial solvency cushion | Court affirmed trial judgment for defendants — bankruptcy court credited defendants' experts and found SemGroup solvent at distribution date |
| Proper valuation methodology for solvency | Asset Approach (plaintiff) emphasizing write-downs and unrecoverable receivables | Income/Discounted cash flow approach (defendant) treating trading exposure as removable by novating the trade book | Court accepted bankruptcy court's credibility determinations and the Income Approach as more persuasive for a going concern |
| Role of availability of credit in "unreasonably small capital" analysis | Plaintiff argues foreseeability of credit withdrawal should be considered | Defendant argues actual availability of credit at transfer controls; hypothetical withdrawal is too speculative | Court followed Moody: availability of credit is relevant, but here credit remained available and plaintiff's multi-step speculation failed |
Key Cases Cited
- Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056 (3d Cir. 1992) (defines "unreasonably small capital" and endorses reasonable-foreseeability test including availability of credit)
- Boyer v. Crown Stock Distributions, Inc., 587 F.3d 787 (7th Cir. 2009) (cautions against hindsight bias; distinguishes insolvency from unreasonably small capital in LBO context)
- Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir. 1991) (articulates standard for appellate review of mixed fact-law questions)
- In re Hechinger Inv. Co. of Del., 298 F.3d 219 (3d Cir. 2002) (addresses de novo review principles for bankruptcy appeals)