In re Sunedison, Inc.
MEMORANDUM DECISION AND ORDER DENYING MOTION FOR A RULE 2004 EXAMINATION
Thе Debtors, TerraForm Power, LLC (“TerraForm LLC”) and TerraForm Power, Inc. (“TerraForm Inc.” and, together with TerraForm LLC, “TERP”) seek authorization to examine Madison Dearborn Capital Partners IV, L.P. and D. E. Shaw Composite Holdings, L.L.C. (collectively, “Shaw”) pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure (“Rule 2004”). (Joint Motion of the Debtors and TERP for an Order Pursuant to Fed. R. Bankr. P. 200k Authorizing the Examination of D.E. Shaw Composite Holdings, L.L.C. and Madison Dearborn Capitаl Partners, IV L.P., dated Mar. 30, 2017 (the ‘Motion”) (ECF Doc. #2692).) The proposed examination relates to a certain sale agreement between the parties and related ■ non-bankruptcy litigation brought by Shaw against TERP in New York state court. Shaw opposed the Rule 2004 motion, the Court denied TERP’s motion from the bench and reserved decision on the Debtors’ motion to conduct a Rule 2004 examination. For the reasons that follow, the Motion is denied.
BACKGROUND
A. The Purchase and Sale Agreement
SunEdison, Inc. (“SUNE”) and non-debtor TERP are аffiliated entities, and SUNE’s most valuable assets are its interests in TERP. On November 17, 2014, SUNE, TERP and Shaw, among others, entered into a Purchase and Sale Agreement (“PSA”)
In the event that an Acceleration Event shall occur, Buyers shall immediately deliver or cause to be delivered the aggregate Accelerated Earnout Payment to the Paying Agent on behalf of the Sellers for each Earnout Project for which no Earnout Project Payment has been made.
(PSA at § 2.04(g) (emphasis added).)
The definition of “Buyers” is thе main source of the dispute between Shaw and TERP. The PSA defined the term “Buyers” to include both SUNE and TerraForm LLC. In addition, TerraForm Inc. guaranteed TerraForm LLC’s PSA obligations. (PSA at § 6.21.) According to Shaw, these provisions are unambiguous, and their net effect rendered TERP severally liable with SUNE for the Accelerated
On November 18, 2015, Shaw wrote letters to TERP demanding confirmation of TERP’s ability to pay its obligations under the PSA (the “November 18, 2015 Letters”). (State Court Amended Complaint at ¶¶ 10, 41.) Approximately three months later, TERP respondеd rejecting Shaw’s interpretation of the PSA and denying responsibility for any-Accelerated Earnout Payment that SUNE might have to pay. (State Court Amended Complaint at ¶¶ 10, 42.)
B. State Court Litigation
On April 3, 2016; Shaw commenced an action against TERP in the New York Supreme Court, Commercial Division (the “State Court Action”) seeking a declaratory judgment regarding TERP’s obligations under the PSA. The case was assigned to Justice Shirley Kornreich. SUNE’s chapter 11 filing on April 21, 2016 triggered an Acceleration Event under the PSA,
C. The Brookfield/TERP Acquisition and the SUNE/TERP Settlement
In the meantime, the Debtors and TerraForm, Inc. were engaged in a joint marketing process for the sale of TerraForm Inc. (See Declaration of John S. Dubel In Support of Debtors’ Motion for Order Pursuant to Bankruptcy Code Sections 105, 362, 363(b), and 365(a) and Bankruptcy Rules 600j, 6006, and 9019 and Local Bankruptcy Rule 6006-1 Authorizing and Approving Certain Settlement Agreements
The Brookfield/TERP Acquisition is relevant to the Rule 2004 request. If it is consummated, SUNE will own 36.9% of TerraForm Inc.’s Class A shares, (see TERP Settlement at Section 2(a)), and an adversе judgment against TERP will diminish the overall value of SUNE’s TerraForm Inc. shares. Moreover, TERP must issue additional Class A shares to Brook-field in accordance with a specific formula in the event of a loss resulting from the State Court Action. (See Selden Declaration, Ex. 3 at § 6.17; Motion at ¶ 12.) This will dilute the interests of the other Class A shareholders, including SUNE.
D. The Joint Rule 2004 Motion
On March 30, 2017, the Debtors and TERP jointly filed the instant Motion with this Court. The Motion seeks Rule 2004 discovery from Shaw through the following six requests (the “Requests”):
1. All Documents and Communications regarding any parties’ rights аnd obligations under Section 2.04 and/or Section 2.09 of the 2014 PSA, including, but not limited to, all documents that refer or relate to any Accelerated Earnout Payment or Earnout Project Payment or their definitions under Section 1.01 of the 2014 PSA.
2. All Documents and Communications provided to, received from, or prepared for any Board, any committee of any Board, and/or any investment or management committee concerning the 2014 PSA or the Payment Agreement.
3. All Communications with any Seller concerning the 2014 PSA, Proposed Amendment No. 2 9 or the Payment Agreement.
4. All Documents and Communications provided to, received from, or prepared for any Board, any committee of any Board, and/or any investment or management committee concerning any proposed amendments to the 2014 PSA, including, but not limited to, Proposed Amendment No. 2, or the Payment Agreement.
5. All drafts of, and proposed аmendments to, the 2014 PSA and any Annex thereto, and the Payment Agreement.
6. All Documents and Communications concerning the November 18, 2015 Letters.
(Requests at 6-7.)
The Debtors and TERP contend that they need the Rule 2004 discovery because an adverse outcome in the State Court Action will reduce the value of SUNE’s stake in TERP. (Motion at ¶2.) “Uncertainty about the nature or magnitude of [Shaw’s] claims could therefore complicate the financing and implementation of the Debtors’ plan of reorganization” and affect recoveries. (Id. at ¶¶2, 4.) The discovery may mitigate any concerns among SUNE’s financing sources and TERP’s stockholders, (id. at ¶ 3), and it will allow the Debtor to evaluate Shaw’s proofs of claim. (Id. at ¶ 20.) The movants concluded that the discovery “is necessary to facilitate the Debtors’ prosecution of these Chapter 11 Cases and stockholder approval of the Brookfield Acquisition. The disposition of TERP is critically important to the formulation of a plan of reorganization of the Debtors, as well as proceeds available for distribution to secured and unsecured creditors of the estate.” (Id. at ¶ 22.)
Shaw objected to the Motion. As a preliminary matter, Shaw maintains that the Requests violate the “pending proceeding” rule in light of the pending State Court Action. (Objection of D. E. Shaw Composite Holdings, L.L.C. and Madison Dearborn Capital Partners IV, L.P. to the Joint Motion of the Debtors and TERP for an Examination Order Pursuant to Federal Rule of Bankruptcy Procedure 2004, dated Apr. 13, 2017 (“Shaw Objection”), at ¶¶ 1, 37, 40-51 (ECF Doc. # 2783).) As to the merits, although the Debtors say they need the disclosure to present a confirma-ble chapter 11 plan, plans are frequently confirmed notwithstanding pending, unresolved litigation. (Id. at ¶¶ 52-53.) Similarly, while TERP contends that greater disclosure is necessary for shareholders to vote on the Brookfield/TERP Acquisitiоn, TERP has acknowledged that closing the Brookfield/TERP Acquisition is not contingent upon resolution of the State Court Action. (Id. at ¶¶ 54-56.) More fundamentally, any uncertainty regarding the State Court Action will not be resolved through the Rule 2004 Requests. (Id. at ¶¶ 64-73.) Rather, the only way to dispel any uncertainty is to litigate the State Court Action to judgment. (Id. at ¶ 64.)
E. The Subsequent Case Events
After the Motion was filed but while it remained undecided, the Debtors made substantial progress in bringing the cases
DISCUSSION
A. Introduction
Rule 2004 provides in relevant part that the Court may authorize the examination of any entity relating “to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate.” Fed, R. Bankr. P. 2004(b). In chapter 11 cases, the examination may extend to matters relating “to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.” Id. The party seeking Rule 2004 discovery has the burden to show good cause for the examination it seeks, and relief lies within the sound discretion of the Bankruptcy Court. Picard v. Marshall (In re Bernard L. Madoff Inv. Secs. LLC), Adv. Pro. No. 08-01789,
Relevance alone is not sufficient to justify a Rule 2004 request. In re Drexel Burnham Lambert Grp., Inc.,
B. The Pending Proceeding Rule
The Court denied TERP’s request for Rule 2004 discovery from the bench based on the “pending proceeding” rule. Under the rule, “once an adversary proceeding or contested matter is commenced, discovery should be pursued under the Federal Rules of Civil Procedure and not by Rule 2004,” In re Enron Corp.,
The State Court Action is a pending proceeding within the meaning of the rule. TERP can seek discovery relating to the meaning of “Buyer” or the merits of the action pursuant to the NYCPLR. Although NYCPLR 3214(b) generally stays discovery upon the filing of a motion to dismiss unless the court orders otherwise, Justice Kornreich’s Local Rules of Court governing the State Court Action explicitly provide that “[discovery is not stayed by the filing of a dispositive motion or a mediation, unless otherwise directed by the court.” N.Y. R. COM. N.Y. Part 54, at p. 1607 (MсKinney 2017). TERP cannot circumvent the pending proceeding rule by seeking one-sided discovery through a Rule 2004 request in this Court.
C. The Debtors’ Request
Shaw also argues that the Debtors are barred from taking Rule 2004 discovery under the pending proceeding rule. (Shaw Objection at ¶ 37.) The Debtors are not parties to the State Court Action, and hence, the rule does not apply- to them. The Debtors are entitled to Rule 2004 discovery from Shaw if they can establish cause. They argue that cause exists because the outcome of the State Court Action will have a material effect on the value of an important asset, the TERP shares.
Relevance, however, is not enough; the Debtors must show that they need the discovery for some appropriate purpose, or that the failure to get the discovery will result in hardship or injustice. This they have not done. Rule 2004 may permit a debtor to conduct discоvery into the value of the stock owned in a non-
The Debtors have failed to demonstrate that the discovery they seek is needed to accomplish the purposes they have identified. They assert that they need the information to finalize their plan, ensure accurate disclosure, reassure lenders and secure exit financing, and confirm and implement their plan. Debtors frequently accomplish these goals despite litigation contingencies. More importantly, the Debtors procured $640 million in replacement debtor in possession financing and up to $300 million in exit financing, settled with TERP and committed to support the Brookfield/TERP Acquisition (which is not dependent on the outcome of the State Court Action), finalized a plan, obtained approval of their disclosure statement and scheduled a confirmation hearing, all without receiving the Rule 2004 discovery. The value of the Debtors’ TERP shares may fluctuate as a result of the outcome of the State Court Action as well as for many other reasons, but the lack of discovery has not prevented the Debtor from achieving the goals it set.
The Debtors request to use Rule 2004 to estimate the contingent future value of a subsidiary’s stock based on the outcome of pending litigation also lacks any limiting principle. The difficulties were evident during colloquy between the Court and counsel. At oral argument, the Court posed two hypotheticals. First, could a debtor use Rule 2004 to take discovery from a third party regarding claims it asserted against the debtor’s most important customer in non-bankruptcy litigation that threatened the survival of that customer? (Tr. 4/20 at 26:11-16.) Debtors’ counsel initially implied that the claim against the customer was too indirect, (Tr. 4/20 at 26:18-19), but then reconsidered and said the use of Rule 2004 to examine the strength of that claim was “possible.” (Tr. 4/20 at 27:1-4.) The Court then hypothesized that a debtor’s most significant asset was Microsoft stock and queried whether the debtor сould use Rule 2004 discovery to obtain information from Microsoft’s adversary in a patent litigation pending in another court. (Tr. 4/20 at 27:23-28:3.) Counsel intimated that it would depend on the percentage of Microsoft stock the debtor owned, (Tr. 4/20 at 28:11-12), and if the debtor owned 35% of Microsoft’s stock and was a controlling shareholder, a Rule 2004 examination would be justified. (Tr. 4/20 at 28:25-29:3.)
Counsel’s responses demonstrate the uncertainty involved in extending Rule 2004
The circumstances of the joint Rule 2004 request also give me pause. The request and the movants’ arguments focused on TERP’s liability to Shaw. TERP could pursue that discovery in state court, and is therefore barred from seeking the same discovery through Rule 2004 under the pending proceeding rule. The Debtors and TERP are united in interest regarding the desired outcome of the State Court Action, and the Debtors appear to be using Rule 2004 to help TERP get through Rule 2004 what it should instead seek in the State Court Action. Although the Debtors also suggest that they need discovery from Shaw to еvaluate its claims against the various estates, the Debtors have not disputed their liability or focused a single request on the computation of Shaw’s claims against the estates. In fact, SUNE is committed to pay $231 million to Shaw under the Payment Agreement. (Motion, Ex. C.) In short, they have failed to show any necessity for the Rule 2004 discovery, or that they will suffer injustice or hardship if they do not get it.
Accordingly, the Motion is denied. So ordered.
Notes
. A copy of the PSA is annexed to the Motion as Exhibit B.
. Shaw and SUNE entered into a "Payment Agreement” on December 29, 2015 pursuаnt to which Shaw agreed to forbear from collection and SUNE agreed to pay the $231 million-Earnout Project Payment in installments. (Motion, Ex. C.) TERP was not a party to the Payment Agreement.
. Shaw also contends that an Acceleration Event occurred on or about April 17, 2016 when SUNE terminated the employment of Michael Alvarez and Pete Keel (State Court Amended Complaint at ¶¶ 9, 34-39.)
.TERP disputes that $231 million is the correct amount of its liability, if any. (See Motion at ¶ 10; Selden Declaration, Ex. 1 (“Tr. (1/24/17)”) at 15:2-23.)
. Brookfield simultaneously entered into a separate definitive agreement to acquire TerraForm Global Inc., an affiliate of SUNE and TerraForm Power, Inc., but that agreement is not relevant to the resolution of this Motion.
. A copy of the TERP Settlement is annexed as Exhibit B to the Debtors’ Motion for Order Pursuant to Bankruptcy Code Sections 105, 362, 363(b), and 365(a), Bankruptcy Rules 6004, 6006, and 9019, and Local Bankruptcy Rule 6006-1 Authorizing and Approving Certain Settlement Agreements Among the Debtors and the Yieldcos, dated Mar. 10, 2017 (ECF Doc. # 2570.)
.The Debtors entered into a similar settlement agreement with TerraForm Global Inc. and its subsidiaries, but that settlement is not relevant to the resolution of this Motion.
. None of the parties discuss any specific proposed amendment to the PSA in the Motion or other pleadings. The Requests simply define "Proposed Amendment No. 2” as "the draft ‘Amendment No. 2 to Purchase and Sale Agreement, dated as of December 28, 2015, by and among SunEdison, Inc., TerraForm Power, LLC, D.E. Shaw Composite Holdings, L.L.C, and Madison Dearborn Capital Partners IV, L.P.,’ including any prior versions and/or any drafts thereof,”
. This is not intended to suggest that a stay of discovery would render the pending proceeding rule inapplicable.