Calpine Corp. v. Rosetta Resources Inc. (In Re Calpine Corp.)Calpine Corp. v. Rosetta Resources Inc. (In Re Calpine Corp.)
MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISMISS COMPLAINT
Defendant Rosetta Resources Inc. (“Rosetta”) moves pursuant to Rules 12(b)(1) and (6) of the Federal Rules of Civil Procedure (“Federal Rules”), made applicable herein pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”), for an order dismissing the complaint filed by Calpine Corporation (“Calpine”), or in the alternative, an order staying this adversary proceeding, pending the determination of whether creditor claims will be satisfied in full pursuant to the plan of reorganization proposed by Calpine and its affiliated debtors (collectively, the “Debtors”). The complaint seeks to avoid the transfer of Calpine’s property to Rosetta pursuant to sections 548 and 544 of title 11, United State Code (the “Bankruptcy Code”) and to recover the property or its monetary value, with interest, pursuant to section 550 of the Bankruptcy Code. 1
Background
According to the complaint, prior to the petition date, on July 7, 2005, Calpine entered into a purchase and sale agreement to sell substantially all of its remaining domestic oil and gas assets (other than certain gas pipeline assets) (the “Rosetta Sale”) for $1.05 billion to a group led by Calpine insiders, the management team of its subsidiary, Rosetta. 2 The buyers funded the purchase price through debt and a private placement offering of equity in which they themselves participated. The bulk of the assets consisted of in-ground unextracted hydrocarbons not facilely estimated by either bankers or non-insider hydrocarbon experts.
At the time of the Rosetta Sale, Calpine was experiencing a liquidity crisis and combined with its debt load, rendered it unable to meet massive debt payments due in 2005. Accordingly, Calpine began liquidating assets not subject to liens and debt restrictions. Calpine asserts that spinning off the Rosetta assets to insiders helped Calpine generate cash quickly, without the regulatory and due diligence delays of an IPO or an orderly asset sale. As a result, Calpine never formally offered these oil and gas assets for sale or provided due diligence to potential buyers. Calpine’s board received a fairness opinion issued by bankers who had reviewed the transaction, based principally on information the insiders themselves provided, and concluded that the transaction was fair under the circumstances. But those bankers explicitly disclaimed any opinion as to whether
On June 29, 2007, Calpine commenced this adversary proceeding against Rosetta. Calpine asserts two causes of action, both seeking to (I) avoid the Rosetta sale as a constructively fraudulent transfer and (ii) recover either the oil and gas business Rosetta purchased or its asserted value in monetary damages alleging that less than reasonably equivalent value was provided in exchange for the business. Complaint at ¶¶ 23-29. Calpine alleges that the reasonably equivalent value of the stock of the Calpine affiliates acquired by Rosetta exceeded the $1.05 billion purchase price “by an amount presently estimated to be approximately $400 million.” Complaint at ¶ 20.
Rosetta contends that the complaint must be dismissed pursuant to Federal Rule 12(b)(1), made applicable herein by Bankruptcy Rule 7012, because Calpine lacks standing to assert fraudulent transfer claims, and the Court lacks subject matter jurisdiction over this adversary proceeding. Rosetta also contends that the Complaint should be dismissed pursuant to Federal Rule 12(b)(6), insofar as creditors of the Debtors’ estates have not been harmed, and no claim for relief can be stated against Rosetta.
Rosetta contends that a claim for fraudulent transfer under sections 548 or 544(b) of the Bankruptcy Code is a remedy only available for the benefit of creditors; the remedy is not available to the debtor or the debtor’s equity security holders. Therefore, Rosetta argues, where the creditors have not been harmed, the debt- or or its equity security holders lack standing to prosecute fraudulent transfer claims. Rosetta contends that because the unsecured creditors of these estates will receive full recovery on their claims, with interest, there is no possible way in which Calpine can demonstrate that the creditors of these estates have been harmed as a consequence of the sale of the oil and gas businesses to Rosetta or the sale of Rosetta’s stock to unaffiliated institutional investors. Thus, as a matter of law, Rosetta argues that the relief sought in Calpine’s Complaint is not available to Calpine, which lacks standing to prosecute the claims, Calpine has no claim to assert for which relief can be granted and the Complaint therefore must be dismissed. Rosetta also argues that the Complaint must be dismissed because it does not allege any transfer actually made by Calpine to Rosetta.
In addition, Rosetta contends that the Complaint must be dismissed because it will not yield any net benefit to the estates. Even if Calpine can somehow recover some amount from Rosetta pursuant to section 550 of the Bankruptcy Code, Rosetta submits that such recovery will give rise to a prepetition unsecured claim by Rosetta under the Purchase Agreement and section 502(h) of the Bankruptcy Code for the amount of such recovery, which must be paid, in full, before any distribution can be made to Calpine’s shareholders. Thus, a “successful” outcome in this litigation for Calpine will yield no net benefit to the creditors, while it will yield a net loss to the estates based on the costs and expenses of this complex litigation.
Lastly Rosetta claims that to the extent there is any doubt regarding the recoveries creditors will receive from these estates, the Court should stay this adversary proceeding, until such time as all issues of valuation of the Debtors’ businesses and assets can be fully vetted, and the Debtors are able to confirm their belief that the creditors of these estates will receive a 100% recovery on their claims.
When considering a motion to dismiss a complaint under Federal Rule 12(b)(6), a court must accept all factual allegations in the complaint as true, even if the allegations are doubtful in fact.
Bell Atlantic Corp. v. Twombly,
— U.S. -,
A court’s function on a motion to dismiss is “not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient.”
Goldman v. Belden,
The Bankruptcy Code bestows broad powers upon a trustee to avoid certain transfers of property made by the debtor before the filing of the bankruptcy petition. “In this way, the transferred property is returned to the estate for the benefit of all persons who have presented valid claims.”
See Christy v. Alexander & Alexander of NY, Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey),
To the extent a transfer is avoided under various provisions of the Bankruptcy Code, under section 550(a), the trustee may recover, for the benefit of the estate, the property transferred, or, if the Court so orders, the value of such property. 11 U.S.C. § 550(a);
In re Adler, Coleman Clearing Corp.,
“Courts have consistently held that an avoidance action can only be pursued if there is some benefit to creditors and may not be pursued if it would only benefit the debtor.”
BalaberStrauss v. Town of Harrison (In re Murphy),
However, as the Ninth Circuit has explained
Courts construe the “benefit to the estate” requirement broadly, permitting recovery under section 550(a) even in cases where distribution to unsecured creditors is fixed by a plan of reorganization and in no way varies with recovery of avoidable transfers. In several cases, for example, courts have refused to dismiss avoidance actions even though the unsecured creditors had received full distributions under a plan of reorganization. The courts reasoned that the litigation could “benefit the estate” because the creditors had received an equity stake in the reorganized debtor and any recovery would increase the corporation’s value. See Trans World Airlines, Inc. v. Travellers Int’l AG (In re Trans World Airlines, Inc.),163 B.R. 964 , 973 (Bankr.D.Del.1994) (“[T]he unsecured creditors will benefit from the enhanced value of reorganized TWA by reason of being shareholders of the reorganized debtor.”); [In re Southern Industrial Banking Corp.,59 B.R. 638 , 641 (Bankr.E.D.Tenn.1986) ](“[To] the extent that ... recovery of fraudulent transfers ... operates to increase the assets and financial health of the [debtor’s] successor-in-interest, it also operates to proportionally increase the value of those ownership rights in the successor-in-interest which constitute a portion of the unsecured creditors’ distribution under the plan.”).
Acequia, Inc. v. Clinton (In re Acequia, Inc.),
The determination of whether a recovery would benefit the estate is done on a case-by-case basis.
Gonzales v. Conagra Grocery Products Co. (In re Furr’s Supermarkets, Inc.),
In its Disclosure Statement, Cal-pine predicts, based upon the estimates of future value of the reorganized company and the value of disputed claims, that the equity in the reorganized company may be sufficient to satisfy the unsecured creditor claims. However, the valuation relies on a variety of assumptions including future company performance, market events, financing and other events that may or may not materialize. Calpine acknowledges that under some of its own valuation models, some unsecured classes may not receive sufficient stock to pay both the owed principal and interest. In all events, unsecured creditor claims would be satisfied in whole or in part with distributions of equity in the reorganized company. Under the proposed plan of reorganization, several classes of unsecured creditors will be impaired because they are receiving only an equity stake in the reorganized company.
See DuVoisin v. East Tenn. Equity, Ltd. (In re Southern Indus. Banking Corp.),
Rosetta’s additional arguments challenging the Complaint are premature in light of the fact that the allegations of the Complaint must be taken as true. Rosetta argues that Calpine is not the proper plaintiff because the operative agreements by which the oil and gas business was sold demonstrate that affiliates of Calpine, not Calpine itself, made the transfers to Rosetta. However, the Complaint alleges that Calpine sold its oil and gas properties to Rosetta and that the transaction, however it was structured, constituted a transfer by Calpine. Moreover, the transaction documents referred to by Rosetta are neither identified not referred to in the operative allegations of the Complaint and may not be considered on a motion to dismiss.
See Chambers v. Time Warner Inc.,
Similarly, Rosetta’s speculation that any recovery the Debtor would obtain would be negated by a claim of Rosetta under section 502(h) is simply that — speculation. See 4 Collier on Bankruptcy § 502.09[2] at 502-74 (15th ed. rev.2007) (explaining that the amount of the claim allowable under section 502(h) is not the value of the property recovered but rather the value of the consideration paid by the transferee for the property recovered.).
Accordingly, the motion to dismiss is denied in all respects.
IT IS SO ORDERED.
Notes
. The Official Committee of Unsecured Creditors (the "Creditors' Committee”) and the Official Committee of Equity Security Holders (the "Equity Committee”) have intervened in this adversary proceeding and have filed objections to Rosetta's motion.
. Rosetta was formed in 2005 for the purpose of acquiring and operating substantially all of the oil and gas exploration and production business of Calpine, through its subsidiaries.
. The
Murphy
judge noted in a subsequent opinion that "It is
not
clear that fraudulent conveyance claims can
never
be brought in whole or in part to benefit equity.... In most cases, from the perspective of Bankruptcy Code objectives, it makes sense to say that fraudulent conveyance claims may be asserted only to the extent necessary to benefit creditors, as opposed to the debtor and the debtor’s equity. But I decline to embrace an all-encompassing bright line rule holding that a fraudulent conveyance claim can never be brought to benefit equity.”
In re Bayou Group, LLC,