Charys Liquidating Trust v. McMahan Securities Co. (In Re Charys Holding Co.)Charys Liquidating Trust v. McMahan Securities Co. (In Re Charys Holding Co.)
OPINION 1
Before the Court is a motion to dismiss (the “Motion”) [Docket No. 6] brought by
I. BACKGROUND
On or about October 11, 2006, Charys Holding Company, Inc. (“Charys”) entered into an agreement with McMahan (the “Engagement Letter”) whereby McMahan agreed to serve as Charys’s “exclusive financial advisor and placement agent” in connection with a private placement by Charys of up to $150 million in senior convertible notes (the “Notes”). (Compl. ¶ 10). The Engagement Letter also provided McMahan the option, which McMa-han subsequently exercised, to place an additional fifteen percent (15%) of the amount of the offering. (Id. at ¶ 11). Charys later entered into an indenture agreement with the Bank of New York Mellon Trust Company, N.A., as trustee, and then issued $201,250,000 of Notes (the “McMahan Financing”). (Id. at ¶ 13).
The Engagement Letter provided that McMahan was to receive a fee of four percent (4%) of aggregate gross proceeds of a placement up to $75 million and a fee of five percent (5%) of aggregate gross proceeds in excess of $75 million. (Id. at ¶ 12).
On or about February 16, 2007, McMa-han withheld $9,957,000 million from Char-ys’s portion of the initial proceeds of $175 million from the first Notes issuance. On or about March 8, 2007, McMahan withheld an additional $1,434,635.42 from Charys’s portion of the additional proceeds of $26,250,000 from the second Notes issuance. McMahan received payments totaling $11,391,635.42 (the “Transfers”) on account of the McMahan Financing. (Id. at ¶¶ 14-15).
The Complaint alleges that pursuant to the terms of the Engagement Letter, McMahan’s fees should have totaled not more than $9,312,500. (Id. at ¶ 17). McMahan’s fees allegedly exceeded the amounts provided for in the Engagement Letter by $2,079,135.42. (Id. at ¶ 17). In addition, Plaintiffs allege that McMahan’s fees exceeded the prevailing market rate for comparable investment banking services. (Id. at ¶ 16). Plaintiffs further allege that McMahan failed to obtain favorable terms on the Notes, failed to conduct proper due diligence in connection with the Notes issuance, and encouraged Charys to take on more debt than was justified by Charys’s financial position. (Id. at ¶¶ 16, 18). On account of McMahan’s allegedly excessive fees and the facts alleged, Plaintiffs conclude that Charys did not receive reasonably equivalent value for the Transfers. (Id.).
Plaintiffs allege that prior to the Transfers, in January of 2007, Charys’s balance sheet reflected tangible net assets of $74,667,392 and then-current liabilities of $97,749,969. (Id. at ¶ 21). Although Char-ys’s balance sheet also reflected intangible goodwill of over $208 million, Plaintiffs allege that this goodwill was rendered valueless by going-concern opinions issued by Charys’s independent outside accountants. (Id. at ¶ 23).
Accordingly, Plaintiffs allege that Char-ys was insolvent prior to the Transfers, following the Transfers, and remained insolvent through February 14, 2008 (the “Petition Date”), when Charys, along with its affiliate Crochet & Borel Services, Inc. (together, the “Debtors”) filed petitions for relief under chapter 11 of title 11 of the United States Code. (Id. at ¶ 28).
Over a year thereafter, on February 24, 2009, the Court entered an Order (the “Confirmation Order”) [Docket No. 669] confirming the First Amended Joint Plan of Reorganization of Debtors and Certain Nondebtor Affiliates under Chapter 11 of the Bankruptcy Code, Dated December 8, 2008 (the “Plan”). Pursuant to the Plan and Confirmation Order, the Trusts were created and certain of the Debtor’s assets, including avoidance causes of action were transferred to the Trusts.
Thereafter, on February 12, 2010, the Trusts instituted this adversary proceeding by filing the Complaint. On April 8, 2010, McMahan filed the Motion, seeking to dismiss the Complaint. The Trusts filed a response in opposition to the Motion (the “Response”) [Docket No. 9], and an amended version of the Complaint [Docket No. 10]. McMahan then filed a reply (the “Reply”) [Docket No. 15]. McMahan also requested that the Court hear oral argument on the Motion [Docket No. 22], which request the Court has declined [Docket No. 25]. This matter has been fully briefed and is ripe for decision.
II. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of the Motion constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (H).
III. STANDARD OF REVIEW
Defendant seeks dismissal of the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable by Federal Rule of Bankruptcy Procedure 7012, for “failure to state a claim upon which relief can be granted.” Fed. R.Civ.P. 12(b)(6). A Rule 12(b)(6) motion tests the sufficiency of a complaint’s factual allegations.
Bell Atl. Corp. v. Twombly,
To decide a motion to dismiss, a court must “accept all well-pleaded allegations in the complaint as true, and view them in the light most favorable to the plaintiff.”
Carino v. Stefan,
Following the Supreme Court’s recent rulings on Rule 12(b)(6) in
Twombly
and
[SJtating ... a claim requires a complaint with enough factual matter (taken as true) to suggest the required element. This does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.
Phillips,
Federal Rule of Civil Procedure 8, applicable here pursuant to Federal Rule of Bankruptcy Procedure 7008, requires that a complaint contain, “a short and plain statement of the claim showing that the pleader is entitled to relief,” to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.”
Twombly,
IV. PARTIES’POSITIONS
A. Defendant’s Position
Defendant argues that the Complaint should be dismissed because it fails to sufficiently allege facts supporting constructive fraudulent transfers. (Def.’s Br. 1). Defendant argues that the Complaint’s pleading deficiencies include a lack of facts regarding what services McMahan provided to which Debtors and how such services were not reasonably equivalent value for the Transfers. (Id. at 2). Additionally absent, argues Defendant, are facts regarding the Debtors’ insolvency. (Id. at 2). Defendant also argues that the Complaint acknowledges that the Transfers were made on account of an antecedent debt, and therefore, the Transfers were for reasonably equivalent value and cannot be avoided as fraudulent. (Id. at 1). Defendant attempts to draw a distinction between avoidance of the Transfers and avoidance of Charys’s obligations under the Engagement Letter. (Def.’s Reply 6-7). Defendant argues that because the Complaint only seeks to avoid the Transfers and not the Engagement Letter, the Complaint is deficient. (Id.).
Defendant further maintains that Plaintiffs’ section 544(b) claim, which incorporates the laws of three states and two
Defendant also contends that a forum selection clause in the Engagement Letter is binding on the Trusts and that claims related to the Engagement Letter must be brought in Connecticut. (Def.’s Reply 4-5). Defendant argues that Plaintiffs have not met their burden to show that enforcement of the clause would be unreasonable or unfair under the circumstances and that, in fact, enforcement would be reasonable. (Id. at 5).
Defendant finally argues that the C & B Liquidating Trust has no interest in the assets of the estate of Debtor Charys, including avoidance actions, and therefore, the C & B Liquidating Trust has no right to prosecute the Complaint against McMa-han. (Def.’s Reply 2-3). As a result, argues Defendant, the C & B Liquidating Trust is not entitled to relief on account of the Transfer. (Id.).
B. Plaintiffs’ Position
Plaintiffs argue that the Complaint, as amended, addresses the alleged pleading deficiencies and adequately pleads claims for constructive fraudulent transfers. Plaintiffs contend that the amended Complaint specifies the Transfers that were made, the debtor that made the Transfer (Charys), and Charys’s insolvency (Pl.s’ Resp. 8-10). In addition, Plaintiffs argue that they allege sufficient facts to show lack of reasonably equivalent value under a totality of the circumstances analysis because the Transfers were both above market rates and the rates agreed to in the Engagement Letter. (Id. at 4-5). Plaintiffs argue that transfers of account of antecedent debt are not per se transfers for reasonably equivalent value. (Id. at 3-5).
Plaintiffs further argue that forum selection clauses do not apply to statutory fraudulent transfer claims, because such claims constitute core proceedings that arise by operation of statute rather than from a contract, and are asserted derivatively on behalf creditors who were not parties to the original contract. (Id. at 6-7).
Finally, Plaintiffs argue that the Complaint clearly provides fair notice of the applicable state law that Plaintiffs’ section 544 claims alternatively arise under. (Id. at 10-11). Accordingly, Plaintiffs request that the Court deny the Motion.
V. DISCUSSION
A. The Forum Selection Clause Does Not Govern Plaintiffs’ Constructive Fraudulent Transfer Claims
The Third Circuit has recognized that the law of the state whose law governs the construction of a contract “generally applies to the determination whether to enforce a forum selection clause unless ‘a significant conflict between some federal policy or interest in the use of state law exists.’ ”
Diaz Contracting Inc. v. Nanco Contracting Corp.,
In
Bremen,
the United States Supreme Court stated that “a forum selection clause is
prima facie
valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.”
Bremen,
Despite the general preference for enforcement of forum selection clauses, it is an open question whether forum selection clauses are applicable in “core” bankruptcy proceedings..
See Diaz,
Following
Diaz,
bankruptcy courts in this Circuit have recognized that forum selection clauses should not be enforced in core matters, and specifically with regard to fraudulent transfer claims.
AstroPower Liquidating Trust v. Xantrex Tech. Inc.,
In
AstroPower,
the Delaware Bankruptcy Court refused to apply a forum selection clause to fraudulent transfer claims and accordingly, denied a motion to dismiss for improper venue.
AstroPower,
This Court is persuaded by the reasoning of
AstroPower.
Like the
AstroPower
court, this Court is reviewing a complaint asserting causes of action that arise by operation of statute. In both
Diaz
and
Coastal Steel,
the Third Circuit determined the applicability of forum selection clauses in the context of pre-petition breach of contract claims. The claims arose from the same document containing the forum selection clause and were clearly non-core. Moreover, the Third Circuit has explicitly recognized that
Coastal Steel
left open the question of whether the analysis would be different with respect to core matters.
Diaz,
Here, Plaintiffs’ claims are core matters arising by operation of statute and not from a pre-petition contract. The viability of Plaintiffs’ claims depends on factors other than the terms of the Engagement Letter and the parties conduct, such as Char-ys’s financial condition at the time of the Transfers. In addition to the general bankruptcy policy of consolidating issues related to a debtor’s estate, there are further policy reasons supporting the litigation of statutory avoidance actions in the bankruptcy court. These reasons include the fact that the actions arise irrespective of any contract between the parties and that the real parties in interest are the debtor’s creditors, who were not parties to the original contract.
See AstroPower,
B. The Complaint Adequately Alleges Constructive Fraudulent Transfers
Bankruptcy Code section 548(a)(1)(B) authorizes the avoidance of transfers of interests in the debtor’s property occurring within two years prior to the petition date if the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred ...” 11 U.S.C. § 548(a)(l)(B)(i), (ii)(I).
Section 544, in turn, authorizes avoidance of transfers of an interest of the debtor in property that are voidable by an unsecured creditor under applicable state law. 11 U.S.C. § 544(b)(1). Here, Plaintiffs have alleged that the Transfers are avoidable under “applicable state law, including, but not limited to, the Georgia Uniform Fraudulent Transfer Act, Ga. Code § 18-[2]-[7]0 et seq., the Delaware Fraudulent Transfer Act, 6 Del. C. § 1301 et seq., [and] the New York Fraudulent Conveyance Act, N.Y. Debt, and Cred. Law Art. 10 (§ 270
et
seq.)....”
4
(Compl.
Both Delaware and Georgia have adopted the Uniform Fraudulent Transfer Act (“UFTA”); whereas New York has adopted the Uniform Fraudulent Conveyance Act (“UFCA”). As a general matter both UFTA and UFCA, as adopted by these states, allow a debtor’s creditors to recover property when it is transferred by the debtor without receiving reasonably equivalent value (or fair consideration) if the debtor is insolvent or becomes insolvent as a result of the transfer. The elements of an avoidable transfer under UFTA or UFCA, as adopted by the individual states, do not substantially vary from the elements set forth in Bankruptcy Code section 548(a)(1)(B).
Thus, to survive a motion to dismiss, Plaintiffs’ constructive fraudulent transfer claims predicated on section 548 or 544 must allege sufficient facts that plausibly show: (i) a transfer within the applicable time period; (iii) Charys’s insolvency; and (iii) a lack of reasonably equivalent value (or fair consideration).
Here, the Complaint alleges that in connection with the 2007 Financing, McMahan withheld: (i) $9,957,000 on or about February 16, 2007; and (ii) $1,434,635.42 on or about March 8, 2007. (Compl. ¶ 15). These withholdings were made within the two years preceding the Petition Date. There is no dispute that the Transfers were made within the applicable time period.
The Complaint also sufficiently alleges that the Transfers were made while Charys was insolvent. The Complaint states that as of January 31, 2007 “Charys reported ... a working capital deficit of $38 million.” (Compl. ¶ 20). In addition, at that time, Charys’s consolidated balance sheet reflected intangible goodwill of $208,646,779 and tangible net assets of $74,667,392. (Id. at ¶ 21). Charys’s then-current liabilities were $97,749,969. (Id.). The Complaint asserts that by April of 2007, Charys’s balance sheet reflected intangible goodwill of $162,787,431, tangible net assets of $99,143,037, and then-current liabilities of $203,856,454. (Id. at ¶ 23). The Complaint further alleges that due to going-concern opinions issued by independent accountants in 2006 and 2007, Char-ys’s goodwill was rendered valueless. (Id. at ¶ 24). In addition, the Complaint alleges that “Charys’s tangible net assets were also overvalued at the time of the [T]rans-fer[s].... ” (Id. at ¶ 25).
Assuming the truth of the above facts, as the Court must on a motion to dismiss, Plaintiffs have adequately alleged that the Transfers were made within the statutory period and at a time when Charys was insolvent.
See Joseph v. Frank (In re Troll Commc’ns, LLC),
The Complaint must also, however, adequately allege a lack of reasonably equivalent value. On this element, the Complaint avers that “McMahan’s fees were excessive compared to comparable fees charged by investment banks for similar placements” and that “McMahan’s fees exceeded the fees permitted under the terms of the Engagement Letter.” (Compl. ¶¶ 32-33). Plaintiffs also appear
The term “reasonably equivalent value” is not defined in the Bankruptcy Code, however, the Third Circuit has noted that “a party receives reasonably equivalent value for what it gives up if it gets ‘roughly the value it gave.’ ”
VFB LLC v. Campbell Soup Co.,
Plaintiffs here have alleged that the Transfers to McMahan were in excess of the prevailing market and applicable contract rates. Plaintiffs allege that McMa-han received a total of $11,391,635.42, which exceeded the fees allowed in the Engagement Letter by $2,079,135.42. (Compl. ¶ 17). 5 Plaintiffs also allege that the fees “exceeded the prevailing rate for comparable investment banking services.” {Id. at ¶ 16). These allegations go to showing a gap between market rates and the amounts paid.
In reply, Defendant argues that
In re APF Co.,
C. The Complaint Adequately States a Claim for Recovery of Avoided Transfers
Count III of the Complaint seeks to recover the Transfers pursuant Bankruptcy Code section 550(a), that states:
[e]xcept as otherwise provided in this section, to the extent that a transfer is avoided under section 544, ... [or] 548 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred ... from’ (1) the initial transferee of such transfer of the entity for whose benefit such transfer was made; or (2) any: immediate or mediate transferee of such initial transferee.
11 U.S.C. § 550(a). The Complaint alleges that that “[o]n or about February 16, 2007, McMahan withheld $9,957,000 from Charys’s portion of a $175,000,000 in proceeds of from [sic] the initial issuance of the senior convertible notes. On or about March 8, 2007, McMahan withheld $1,434,635.42 in fees from Charys’s portion of an additional $26,250,000 in proceeds from a second issuance of the senior convertible notes.” (Compl. ¶ 15). The Complaint attaches documentation of the withholdings. {See Compl. Ex. A). The Complaint contains sufficient facts from which the Court could infer that McMa-han was the initial transferee of transfers that are avoidable pursuant to section 544 or 548 of the Bankruptcy Code. As explained above, the Court will deny the Motion with respect to Plaintiffs’ claims under sections 544 and 548 and will likewise deny the Motion with respect to Plaintiffs’ section 550 claim. 6
VI. CONCLUSION
The Court will deny the Motion. An appropriate Order follows.
ORDER
Upon consideration of the motion to dismiss (the “Motion”) [Docket No. 6] filed by defendant McMahan Securities Co., L.P., plaintiffs’ response to the Motion [Docket No. 9]; and defendant’s reply thereto [Docket No. 15]; and for the reasons set forth in the accompanying Opinion, it is hereby
ORDERED, that the Motion is DENIED.
. "The court is not required to state findings or conclusions when ruling on a motion under Rule 12 ..." Fed. R. Bankr.P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Notes
. Plaintiffs' constructive fraudulent transfer claims are governed by Rules 8 and 12(b)(6) and not the heightened Rule 9(b) pleading standard.
China Resource Prods. (U.S.A.) Ltd. v. Fayda Int’l, Inc.,
. The forum selection clause in the Engagement Letter provides:
This agreement shall be governed by and construed in accordance with the laws of the State of Connecticut applicable to agreements made and fully performed therein, without regard to conflicts of law principles. The Company [Charys] irrevocably submits to the exclusive jurisdiction of any court of the State of Connecticut or the United States District Court for the District of Connecticut for the purpose of any suit, action or other proceeding arising out of this Agreement, or any of the agreementsor transactions contemplated hereby, which is brought by or against the Company.... Engagement Letter, ¶ 11.
. Section 1305(a) of the Delaware Code and section 18-2-75 (a) of the Georgia Code state in pertinent part: "A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” 6 Del. Code Ann. tit. 6, § 1305(a) (2010); Georgia Code Ann. § 18-2-75 (2009).
Section 274 of New York’s Debtor & Creditor Law provides: "Every conveyance made without fair consideration when a person making it is engaged or is about to engage in a business transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard
. Defendant argues that, even though the Engagement Letter was not attached to the Complaint, it was relied upon therein and the Court may consider the Engagement Letter under the "integral exception” without converting the Motion into one for summary judgment. Plaintiffs do not appear to disagree and have not disputed the authenticity of the Engagement Letter attached as an exhibit to Defendant’s brief in support of the Motion. The Court agrees with Defendant that several of the Complaint’s allegations rely on the Engagement Letter and the Court may consider the Engagement Letter without converting the Motion.
Winer Family Trust v. Queen,
. To the extent that the Motion contained other grounds for dismissal, the Court has considered and rejects such arguments.