CLEVELAND-CLIFFS BURNS HARBOR LLC, a Delaware limited liability company, and CLEVELAND-CLIFFS STEEL LLC, a Delaware limited liability company, Plaintiffs, v. BOOMERANG TUBE, LLC, a Delaware limited liability company, BLACK DIAMOND CAPITAL MANAGEMENT, L.L.C., a Delaware limited liability company, and PTC LIBERTY TUBULARS, LLC, a Delaware limited liability company, Defendants.
C.A. No. 2022-0378-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
September 5, 2023
Date Submitted: May 2, 2023
Date Decided: September 5, 2023
Kevin M. Capuzzi & Kate Harmon, BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP, Wilmington, Delaware; Andrew G. Fiorella & Nathan H. Boninger, BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP, Cleveland, Ohio; Counsel for Plaintiffs Cleveland-Cliffs Burns Harbor LLC and Cleveland-Cliffs Steel LLC
David E. Ross, S. Michael Sirkin & Thomas C. Mandracchia, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Counsel for Defendant Black Diamond Capital Management, L.L.C.
WILL, Vice Chancellor
In December 2020, an affiliate of Black Diamond Capital Management, L.L.C.—Boomerang‘s purported controller—initiated an auction of Boomerang‘s assets. According to Cleveland-Cliffs, the sale was a sham intended to place the assets out of certain creditors’ reach. Notice of the auction was sent on Christmas Eve of 2020, with the sale occurring just ten days later. The purchaser, PTC Liberty Tubulars, LLC, is another Black Diamond affiliate.
Cleveland-Cliffs maintains that PTC Liberty effectively became Boomerang after the sale. PTC Liberty has the same ownership, officers, facilities, products, and customers that Boomerang once had. Conversely, Boomerang exists in name only.
Cleveland-Cliffs has now sued Boomerang, Black Diamond, and PTC Liberty on varied (and novel) legal theories to recover the $7 million Boomerang owes it. Black Diamond and PTC Liberty insist that Cleveland-Cliffs is nothing more than an unsecured creditor trying to collect from the wrong entities. But, given the shady circumstances surrounding the asset sale, that may be an oversimplification.
I. FACTUAL BACKGROUND
Unless otherwise noted, the following facts are drawn from the plaintiffs’ Verified Amended Complaint (the “Complaint“) and the documents it incorporates by reference.1
A. Boomerang‘s Bankruptcy
Boomerang Tube, LLC (“Boomerang“) is a Delaware limited liability company with its principal place of business in Texas or Missouri.2 Boomerang produced highly engineered oil country tubular goods for natural gas and crude oil drilling markets in the United States and Canada.3 On June 9, 2015, Boomerang and
Under the Chapter 11 plan, Black Diamond Capital Management, L.L.C. (“Black Diamond“) became Boomerang‘s majority owner.6 Black Diamond, a Delaware limited liability company with headquarters in Connecticut, is an alternative asset management firm specializing in high-yield credit, stressed and distressed credit, restructurings, and business turnarounds.7 The Chapter 11 plan also gave Black Diamond “exclusive control over the election of” a majority of the members of Boomerang‘s board of directors.8 Black Diamond appointed four of its own employees to the board, with one of its Senior Managing Directors later serving as Chairman.9 Black Diamond was also a senior secured creditor of Boomerang.10
B. Boomerang‘s Purchases from ArcelorMittal
Between June and November 2020, Boomerang conducted business with ArcelorMittal Burns Harbor LLC and ArcelorMittal USA LLC (together,
C. Cleveland-Cliffs’ Purchase of ArcelorMittal
On or around December 9, 2020, Cleveland-Cliffs Burns Harbor LLC and Cleveland-Cliffs Steel LLC (together, “Cleveland-Cliffs“) acquired ArcelorMittal.13 ArcelorMittal‘s rights and accounts associated with Boomerang were transferred to Cleveland-Cliffs.14 As such, Cleveland-Cliffs became ArcelorMittal‘s successor-in-interest with respect to the Terms & Conditions Agreement.15
Boomerang remained delinquent on the Unpaid Invoices.16 Shortly after Cleveland-Cliffs acquired ArcelorMittal, Boomerang sought to purchase another $1.5 million of goods from Cleveland-Cliffs.17 Boomerang indicated that it had
D. Boomerang‘s Article 9 Sale
On December 24, 2020 (Christmas Eve), Black Diamond Commercial Finance, L.L.C., as administrative agent for Boomerang‘s secured creditors, gave notice of a foreclosure sale under Article 9 of New York‘s Uniform Commercial Code (UCC).20 Black Diamond Commercial Finance is a subsidiary of Black Diamond.21 The notice stated that the assets of Boomerang and its affiliates would be sold in a public auction.22 Bids were due within ten days—by Sunday January 3, 2021—and the auction would occur on January 4.23 The notice also explained that Boomerang owed approximately $110 million “to Black Diamond Commercial Finance and an unnamed group of lenders.”24 Boomerang did not provide notice of the sale to Cleveland-Cliffs.25
Centric Pipe initially submitted a bid.30 But after learning that the competing bidder was affiliated with Black Diamond, Centric Pipe bowed out of the auction.31 Bidco submitted the winning $16.5 million bid for all of Boomerang‘s assets.32 The agreement between Black Diamond Commercial Finance as foreclosing seller, and Bidco as buyer, was memorialized in an Asset Purchase Agreement (the “APA“).33 Black Diamond‘s General Counsel executed the APA on behalf of Bidco.34
After the foreclosure sale, Boomerang allegedly ceased to exist as anything other than a shell entity.35 It “is no longer in good standing with the Delaware Department of State and has failed to timely pay its annual taxes.”36 It has yet to appear in this action.
PTC Liberty effectively replaced Boomerang.37 PTC Liberty operates the two manufacturing facilities once run by Boomerang.38 PTC Liberty has the same officers, manufactures and sells the same products to the same customers, uses the same equipment at the same facilities, and employs the same individuals as Boomerang.39 Boomerang‘s former website and PTC Liberty‘s current website give nearly identical descriptions of the companies.40 And, like Boomerang, PTC Liberty “remains under the ownership and control of Black Diamond and its affiliates.”41
F. The Demand Letter
On May 24, 2021, Cleveland-Cliffs sent a letter to Boomerang, Black Diamond, and PTC Liberty, demanding payment for the Unpaid Invoices.43 The parties attempted to resolve the matter.44 On June 9, they executed a tolling agreement that preserved all claims and defenses through August 6.45 The tolling period was extended until April 29, 2022, but no resolution was reached.46
G. This Litigation
On April 29, 2022, Cleveland-Cliffs filed this action against Black Diamond, PTC Liberty, and Boomerang.47 Black Diamond and PTC Liberty separately moved for dismissal on May 25.48 Boomerang, which was served with the complaint on May 6, has yet to appear.49
II. LEGAL ANALYSIS
The defendants’ motions to dismiss for failure to state a claim on which relief can be granted are governed by Court of Chancery Rule 12(b)(6). The standard that applies is as follows:
- all well-pleaded factual allegations are accepted as true;
- even vague allegations are “well-pleaded” if they give the opposing party notice of the claim;
- the Court must draw all reasonable inferences in favor of the non-moving party; and
- dismissal is inappropriate unless the “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.”59
The “pleading standards for purposes of a Rule 12(b)(6) motion ‘are minimal.‘”60 The “reasonable conceivability” standard a plaintiff must meet to survive a Rule 12(b)(6) motion asks only “whether there is a ‘possibility’ of
I begin by assessing Cleveland-Cliffs’ request for veil piercing, since it affects my analysis of other claims. After concluding that veil piercing is unavailable, I determine that Cleveland-Cliffs has stated viable claims for fraudulent transfer and successor liability against PTC Liberty. Its remaining claims are dismissed.
A. Veil Piercing
In Count III of the Complaint, Cleveland-Cliffs seeks a declaratory judgment that “Boomerang, PTC Liberty, and Black Diamond are legally indistinguishable and are each equally liable for Boomerang‘s obligations to Cleveland-Cliffs.”63 Read literally, this assertion would involve three distinct types of veil piercing based on an agency or “alter ego” theory: (1) traditional veil piercing from Boomerang and PTC Liberty up the chain to Black Diamond; (2) reverse veil piercing down the chain from Black Diamond to Boomerang and PTC Liberty; and (3) horizontal (also called sideways or sister) veil piercing between Boomerang and PTC Liberty. Only the first type—traditional veil piercing—is squarely addressed in Cleveland-Cliffs’
1. Traditional Veil Piercing
“It is a general principle of corporate law deeply ‘ingrained in our economic and legal systems’ that a parent corporation (so-called because of control through ownership of another corporation‘s stock) is not liable for the acts of its subsidiaries.”66 Delaware courts depart from this general rule only in exceptional circumstances.67
In the parent/subsidiary context, one exception is the alter ego doctrine—where the subsidiary and the parent “operate[] as a single economic entity such that
Delaware courts consider various factors in assessing whether to disregard the corporate form, including: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder.”71 No single factor is dispositive.72 Rather, “[a]n ultimate
Only the second factor is satisfied as to Boomerang, which was left insolvent after the Article 9 sale.74 There are no allegations about PTC Liberty‘s solvency.75 The remaining factors are unmet.
Regarding the first and third factors, Cleveland-Cliffs has not alleged that Boomerang or PTC Liberty was “[in]adequately capitalized for the undertaking” or failed to observe corporate formalities.76 And other than a conclusory assertion that
Cleveland-Cliffs also falls short of satisfying the fifth factor. With respect to Boomerang, Cleveland-Cliffs avers that Black Diamond was Boomerang‘s “majority owner” and appointed four of its employees to Boomerang‘s seven-member board.78 But “[a] parent corporation is not liable for the acts of its subsidiary merely because it owns (and votes) a majority of the subsidiary‘s stock or shares common shareholders, directors or officers with the subsidiary.”79 As to PTC Liberty, the fact that Black Diamond‘s General Counsel was PTC Liberty‘s representative and signatory on the APA is insufficient to support an inference that the two entities are alter egos.80 It is a “well established principle [of corporate law]
On balance, these factors weigh against viewing Black Diamond as a single economic entity with Boomerang or PTC Liberty. But even if it were reasonably conceivable that Cleveland-Cliffs could satisfy certain factors, its own allegations subvert the notion that Black Diamond is indistinguishable from PTC Liberty or Boomerang. At the parent level, Cleveland-Cliffs describes Black Diamond as an alternative asset management firm based in Connecticut.84 At the subsidiary level, Boomerang and PTC Liberty purportedly operate tubular goods businesses from a Texas location and have manufacturing facilities, employees, products, and customers.85 These facts not only belie any inference that Boomerang or PTC
In terms of the fraud or injustice inquiry, Cleveland-Cliffs’ contentions center on the Article 9 sale that it claims was a fraudulent transfer.88 The fraud or injustice must, however, “come from an inequitable use of the corporate form itself as a sham, and not from the underlying claim.”89 “To hold otherwise would render the fraud or injustice element meaningless, and would sanction bootstrapping.”90
2. Other Veil Piercing Theories
Cleveland-Cliffs does not explicitly seek to recover based on reverse or horizontal veil piercing or enterprise liability. These theories were unbriefed and therefore waived.91 Regardless, each would fail on the merits.
“The natural starting place when reviewing a claim for reverse veil-piercing are the [five] traditional factors Delaware courts consider when reviewing a traditional veil-piercing claim.”92 “The court should then ask whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.”93 Horizontal veil piercing and enterprise liability—which have not been adopted in Delaware—would seemingly also require a prerequisite finding of traditional veil piercing.94 Because
Cleveland-Cliffs has not pleaded a viable basis for traditional veil piercing, these other theories are likewise defective.B. Fraudulent Transfer
In Count II of the Complaint, Cleveland-Cliffs asserts that Boomerang, Black Diamond, and PTC Liberty are liable for a fraudulent transfer under DUFTA. Specifically, it advances constructive fraudulent transfer and actual fraudulent transfer theories against Boomerang (the transferor) and PTC Liberty (the transferee).95 Cleveland-Cliffs further alleges that Black Diamond is liable as a transfer beneficiary under Section 1308(b)(1).96
1. Qualifying “Transfers” of “Assets”
DUFTA applies to “transfers,” which are defined by the statute as “every mode... of disposing of or parting with an asset or an interest in an asset.”97 An “asset” is “property of a debtor,” but excludes “[p]roperty to the extent it is encumbered by a valid lien.”98 And a “valid lien” “means a lien that is effective against the holder of a judicial lien subsequently obtained by legal or equitable process or proceedings.”99 Thus, for a transaction to qualify as a “transfer” of “assets” under DUFTA, the value of the transferred property must exceed the value of any valid liens.100
Cleveland-Cliffs has sufficiently pleaded that the value of the transferred assets exceeds $126 million. The Complaint includes allegations that Boomerang‘s inventory and raw goods were worth $27.5 million, that its Liberty, Texas plant housed $100 million worth of equipment, and that its Houston, Texas plant held state-of-the art equipment of unspecified value.104 Cleveland-Cliffs also avers that during the bankruptcy proceeding, Boomerang was valued at over $300 million.105 Based on these facts, it is reasonably conceivable that the value of the assets sold during the Article 9 sale exceeded that of any valid liens.106
Sections 1304(a)(2) and 1305(a) provide causes of action for constructive fraudulent transfer.107 To state a claim under either provision, a plaintiff must allege “(i) that the transferor failed to receive reasonably equivalent value for the asset transferred; and (ii) that the transferor was insolvent at the time of the transfer, or was rendered insolvent by the transfer.”108 Cleveland-Cliffs is not required to plead these elements with particularity.109 Rather, the claim is subject to the more lenient Rule 8(a) notice pleading standard.110
Regarding the first element, Cleveland-Cliffs adequately pleads that the foreclosure failed to net Boomerang a “reasonably equivalent” value for “the assets transferred.”115 Cleveland-Cliffs alleges that the assets Bidco (i.e., PTC Liberty) bought in the foreclosure sale were worth over $100 million and that Boomerang‘s “outstanding debt obligations” were not assumed through the purchase.116 In exchange, PTC Liberty paid $16.5 million.117 If true, this is obviously a significant disparity in value.118
Accordingly, I decline to dismiss the constructive fraudulent transfer claim against PTC Liberty under Sections 1304(a)(2) and 1305(a).122
Section 1304(a)(1) provides a cause of action for actual fraudulent transfer where “the debtor made the transfer . . . [w]ith actual intent to hinder, delay or defraud any creditor of the debtor.”123 To plead a claim under this provision, a plaintiff must meet the particularity standard of Rule 9(b) by pleading “specific supporting facts describing the circumstances of the transfer,” such as the who, what, and when of the challenged transfer.124 Intent, though, “may be averred generally.”125
The Complaint also sets out multiple facts making it reasonably conceivable that Boomerang had a fraudulent intent. Section 1304(b) provides a “nonexhaustive” list of factors that may be considered in finding “actual intent” for purposes of Section 1304(a)(1).127 “The confluence of several of these factors, without the presence of all of them, is generally sufficient to support a conclusion that one acted with the actual intent to defraud.”128 The allegations serving as “badges of fraud”129 that support several of the Section 1304(b) factors include:
The transfer was made by one insider (Boomerang) to another insider (PTC Liberty), insofar as both entities are ultimately owned and controlled by Black Diamond.130 - The transfer was concealed. Bids for the sale were accepted over a ten-day period from Christmas Eve of 2020 to January 3, 2021—a suspiciously fast turnaround during the winter holidays.131
- The transfer was of substantially all Boomerang assets.132
The transfer occurred less than two months after ArcelorMittal issued its last invoice to Boomerang, which put Boomerang more than $7 million in debt.133 - Boomerang was insolvent at the time of the sale or became insolvent shortly afterward.134
- The assets sold were worth over $100 million but purchased by PTC Liberty for $16.5 million.135
PTC Liberty argues that these allegations of fraudulent intent are deficient because they are keyed to Black Diamond (or Black Diamond Commercial Finance) rather than Boomerang.136 In PTC Liberty‘s view, “unless alter ego [liability] applies . . . Black Diamond‘s intent cannot be imputed to Boomerang.”137 No authority is cited for this proposition. This conclusory argument raises a thorny (and seemingly novel) question: can fraudulent intent be imputed from one entity to another absent alter ego liability?
Because I conclude that Cleveland-Cliffs has generally pleaded facts showing Boomerang‘s intent, I need not definitively resolve this question today. Nevertheless, I pause on it since PTC Liberty seems to think it is a slam dunk. I tend
Veil piercing on an alter ego theory requires entities to be functionally one in the same.138 But several of the factors Delaware courts consider when assessing alter ego liability (such as solvency, adequate capitalization, or observation of corporate formalities) have little bearing on the issues of control central to the imputation inquiry. For a fraudulent conveyance claim, the actual fraudulent intent of an entity exercising control over a transferor may be imputed to the transferor.139 The imputation inquiry—at least in the bankruptcy context—can also look to the intent of the controller‘s officers and directors who caused the transfer.140
The motion to dismiss is therefore denied as to the actual fraudulent transfer claim against PTC Liberty.142
4. Transfer Beneficiary
Finally, Cleveland-Cliffs seeks relief under DUFTA from Black Diamond, which was not a party to the sale.143 Section 1308(b)(1) allows a creditor to recover
Delaware courts have applied a three-factor test used by bankruptcy courts to detect beneficiary status: “(1) whether the benefit was received by the beneficiary; (2) whether the benefit is quantifiable; and (3) whether the benefit is ‘accessible to the beneficiary.‘”146 This case hinges on the first and third factors. Cleveland-Cliffs
In support of this argument, Cleveland-Cliffs relies on In re McCook Metals, L.L.C. a decision by the United States District Court for the Northern District of Illinois.148 There, the court interpreted transfer beneficiary language in the Bankruptcy Code as permitting a fraudulent transfer claim against an individual controller of an LLC that received contract rights through a challenged transaction.149 The court reasoned that the defendant “received an actual benefit [through] his share of the value of the assets” and that the benefit was accessible to him “through [his] control of [the transferee].”150
The approach taken in McCook has (rightly) been criticized. One year after McCook was issued, the Northern District of Illinois opined that: “The problem with McCook and the few other decisions authorizing this sort of status-based recovery is that they ignore the fundamental nature of corporations. . . . [A] corporation is a legal entity separate from its shareholders, officers, and directors.”151 In another decision, the court observed that because McCook “does not define ‘control,‘” it
To follow McCook and adopt Cleveland-Cliffs’ reasoning would be inconsistent with Delaware‘s policy of safeguarding corporate separateness.153 Courts have widely rejected attempts to pursue fraudulent transfer claims using similar logic.154 Having rejected Cleveland-Cliffs’ attempt to pierce the corporate
C. Successor Liability
In Count I of the Complaint, Cleveland-Cliffs claims that PTC Liberty bears successor liability for the Unpaid Invoices since it “acquired substantially all of Boomerang‘s assets.”155 “In Delaware, when one company sells or otherwise transfers all of its assets to another company, the buyer generally is not responsible for the seller‘s liabilities, including claims arising out of the seller‘s tortious conduct.”156 “Exceptions include: (1) the buyer‘s assumption of liability; (2) defacto
1. De Facto Merger
“The elements necessary to create a de facto merger under Delaware law are the following: (1) one corporation transfers all of its assets to another corporation; (2) payment is made in stock, issued by the transferee directly to the shareholders of the transferring corporation; and (3) in exchange for their stock in that corporation, the transferee agreeing to assume all the debts and liabilities of the transferor.”160
2. Mere Continuation
The mere continuation exception requires that “the purchaser of the assets to be a continuation of ‘the same legal entity,’ not just a continuation of the same business in which the seller of the assets engaged.”164 The ‘primary elements’ of being the same legal entity have been said to include ‘the common identity of the
Although Delaware courts have construed this theory “very narrowly,”166 the Complaint supports its application here. Cleveland-Cliffs alleges that PTC Liberty—like Boomerang—“remains under the ownership and control of Black Diamond and its affiliates.”167 It asserts that Boomerang effectively ceased to exist after the Article 9 sale and was replaced by PTC Liberty—which operates the same business, employs the same facilities, employees, and equipment, has a similar website, and sells to the same customers as Boomerang.168 Cleveland-Cliffs also states that the “same Vice President of Sales, Chief Technical Officer, Plant Manager, Operations Manager, and Product Technology and Field Services Manager” employed by PTC Liberty once worked for Boomerang, among other
PTC Liberty‘s arguments to the contrary would require me to draw inferences against Cleveland-Cliffs. Specifically, PTC Liberty argues that Boomerang existed after the Article 9 sale because PTC Liberty did not purchase certain real property, stock and membership interests in other companies, and equipment.170 Still, it is reasonable to infer from the Complaint that Boomerang no longer exists as a going concern, has effectively been dissolved, and was replaced by PTC Liberty.171 The motion to dismiss Count I is therefore denied as to PTC Liberty.
Count V is a claim for unjust enrichment brought in the alternative against Boomerang, PTC Liberty, and Black Diamond.172 To prevail on an unjust enrichment claim, a plaintiff “must show an enrichment, an impoverishment, a relation between the enrichment and impoverishment, and the absence of justification.”173 “Of cardinal significance is whether a contract already governs the parties’ relationship.”174 If so, the contract is “the measure of [the] plaintiff‘s right.”175
Here, Cleveland-Cliffs alleges that its relationship with Boomerang was governed by the Terms & Conditions Agreement and brings a claim against Boomerang for breaching that contract.176 The Complaint makes clear that the issues underlying the unjust enrichment claim against PTC Liberty and Black Diamond are
Cleveland-Cliffs argues that the unjust enrichment claim should survive because “it is unknown whether Boomerang, which has not appeared yet, will challenge the [Terms & Conditions Agreement‘s] validity.”181 That argument is
In any event, Cleveland-Cliffs has failed to support the elements of an unjust enrichment claim. For example, there are no well-pleaded allegations that Black Diamond was “enriched” by the Article 9 sale. Nor can “some direct relationship”184 between the defendants’ purported enrichment (acquiring assets for less than fair value) and Cleveland-Cliffs’ impoverishment (the inability, as an unsecured creditor of Boomerang, to collect on debts) be reasonably inferred.
Thus, Count V is dismissed against PTC Liberty and Black Diamond.185
E. Declaratory Judgment
Finally, in Count VI, Cleveland Cliffs requests a declaration that the Article 9 sale was not commercially reasonable and therefore noncompliant with the New
Cleveland-Cliffs insists that it can nonetheless ask this court to decide whether it would prevail on a statutory claim under Article 9 if it theoretically had standing. This is proper, it argues, because the defendants raised the sale‘s compliance with Article 9 when moving to dismiss the original complaint.189 But if Cleveland-Cliffs wants to show that the Article 9 sale was noncompliant to defeat a defense, it can litigate the issue as such. It is neither necessary nor appropriate to bring an
III. CONCLUSION
For the foregoing reasons, Black Diamond‘s motion to dismiss is granted and PTC Liberty‘s motion to dismiss is granted in part and denied in part. Counts I, II, III, V, and VI are dismissed with prejudice as to Black Diamond. Counts III, V, and VI are dismissed with prejudice as to PTC Liberty. Counts I and II as brought against PTC Liberty survive.
Within ten days, the parties shall submit a proposed order to implement this decision. Additionally, within thirty days, Cleveland-Cliffs shall inform the court by letter how it intends to proceed as to Boomerang.