OPINION AND ORDER
This ease arises from the leveraged buyout (“LBO”), and subsequent petition for reorganization under Chapter 11 of the United States Bankruptcy Code, of Almac’s Inc. and Almac’s Supermarkets, Inc. (collectively “Al-mac’s”). By this action, Arnold Zahn, as the trustee of the Almac’s Creditor Litigation and Distribution Trust (the “Trustee”), seeks to set aside transfers made to the various defendants in connection with the LBO as fraudulent under Rhode Island law.
The case is now before this Court 1 on the motions of the Yucaipa Defendants 2 and the Citicorp Defendants 3 to dismiss pursuant to Federal Rules of Procedure 9(b) and 12(b)(6), or, in the alternative, to transfer the case to the Central District of California. Despite defendants’ valiant efforts, their numerous and complex arguments are all without merit. With apologies to Shakespeare, defendants’ tale is “full of sound and fury, in the end signifying nothing.” 4 For the reasons that follow, the motions of both the Yucaipa Defendants and the Citicorp Defendants are denied in their entirety.
I. Background
The Court’s prior opinion provides an extensive review of the facts in this case.
See In re Almac’s,
On April 11,1997, both the Yucaipa Defendants and the Citicorp Defendants filed separate motions to dismiss. Both groups of defendants argued that the Trustee’s Complaint should be dismissed because: (1) the Uniform Fraudulent Transfer Act (“UFTA”) does not apply to transfers made in connection with an “above-board” or not otherwise intentionally fraudulent LBO, and the Complaint failed to plead the existence of such fraud; (2) the constructive fraudulent transfer provisions of UFTA § 4 are not available to creditors whose claims arose after a well-publicized LBO; (3) the Complaint failed to plead sufficiently the existence of an unpaid creditor at the time of the LBO who remained unpaid at the time of the Chapter 11
The Yucaipa Defendants argued further that in lieu of dismissal, the case should be transferred to the United States District Court for the Central District of California. 6
The Trustee vigorously contests each of the grounds for dismissal, and maintains that the case should remain in Rhode Island. The Trustee also has offered to amend the Complaint in the event that the Court finds that, as defendants argue, the pleading is insufficient.
At the hearing of defendants’ motions, the Court invited further memoranda on the unresolved threshold issue of whether the Trustee had standing under the Bankruptcy Code to bring the Complaint. After hearing oral argument on the remaining issues, the Court took the matter under advisement.
On June 26, 1997, defendants filed a joint memorandum arguing that the Trustee did not have standing under 11 U.S.C. §§ 550(a) and 1123(b)(3)(B) because any recovery by the Trustee on the avoidance claims would primarily, if not exclusively, benefit the Purchaser. The Trustee rejoined that such a recovery would in fact benefit primarily the unsecured creditors, and thus his standing has been established.
The Court having considered the parties’ arguments, the matter is now in order for decision.
II. Trustee’s Standing
The Court first addresses the threshold issue of the Trustee’s standing under the Bankruptcy Code. The burden of proof must be carried by the party whose standing is questioned.
United States v. AVX Corp.,
Under the Code, the bankruptcy trustee has the power during the pendency of the bankruptcy to avoid “any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim _” 11 U.S.C. § 544(b). Where the trustee succeeds in an avoidance claim, he may “recover, for the benefit of the estate, the property transferred ... ”, or the value of such property from the initial, immediate, or mediate transferee. 11 U.S.C. § 550(a).
The power to bring such actions is unique to the trustee (or debtor in possession) in bankruptcy, and may not be assigned.
See Kroh Bros. Dev. Co. v. United Missouri Bank of Kansas City, N.A. (In re Kroh Bros. Dev. Co.),
Pursuant to § 1123(b)(3)(B), a party, other than the debtor or the trustee, who seeks to prosecute avoidance claims must establish that: (1) it has been appointed; and (2) it is a representative of the estate.
See, e.g., In re Texas Gen. Petroleum Corp., 52
F.3d at 1335;
Retail Marketing Co. v. King (In re Mako, Inc.),
The first element does not appear to be in serious dispute in this case. “The bankruptcy court’s approval of a plan that clearly appoints a stranger to the estate satisfies the first element.”
In re Texas Gen. Petroleum Corp.,
On and as of the Effective Date, the Debtors will assign the Avoidance Claims against the Yucaipa Entities and the Citibank Entities arising directly, or indirectly, out of the Acquisition to the Creditor Litigation and Distribution Trustee ....
Clearer language could not be desired. The Plan specifically appoints this plaintiff to bring these claims. The Bankruptcy Court entered its order confirming the Plan on November 8, 1994. Thus, the first element of the § 1123(b)(3)(B) standing test is met.
The real dispute involves the second element of the test,
i.e.,
whether the Trustee is a “representative of the estate”. Courts determine whether this element is met on a ease-by-case basis.
See, e.g., In re Texas Gen. Petroleum Corp.,
This question has spawned much litigation, with varying results. Generally, however, courts have interpreted “benefit” broadly.
See In re North Atlantic Millwork,
Several courts have found a sufficient benefit to the estate where a purported representative’s successful avoidance recovery would increase the value of a plan’s distributions to unsecured creditors.
See In re Amarex,
Similarly, courts have held that the estate benefits where an avoidance recovery by the debtor’s successor in reorganization would increase the successor’s assets, thus increasing the likelihood of unsecured creditors actually receiving the amounts due under the plan.
See In re Amarex,
In addition, courts have found that the “benefit to the estate” may occur prior to an avoidance recovery.
See Official Committee of Unsecured Creditors of Maxwell Newspapers, Inc. v. MacMillan, Inc. (In re Maxwell Newspapers, Inc.),
In accordance with this broad concept of a benefit to the estate, it is clear, as indeed this Court has already indicated, that every dime of an avoidance recovery need not go to the unsecured creditors for the estate to benefit.
See In re Almac’s,
Several cases hold that an avoidance recovery may not benefit solely a debtor or purchaser.
See id.
at 499 (recognizing “the long line of cases ... holding that the avoiding powers cannot be transferred to . a single creditor or group of creditors for their
sole
benefit .... ”)(emphasis added);
see also Consolidated Pet Foods, Inc. v. Millard Refrigerated Services, Inc. (In re S & D Foods, Inc.),
Even those courts which have expressed reservations about the concept of an indirect benefit to the estate have not gone so far as to declare that
only
the estate may benefit from an avoidance recovery in order for the “representative of the estate” prong of § 1123(b)(3)(B) to be met.
See In re S & D Foods,
“[T]he proceeds will be distributed first to reimburse New Almacs for $500,000 to be advanced by New Almacs to the Creditors Litigation and Distribution Trustee on the Effective Date and to pay the costs of the litigation in excess of the funded costs, to a maximum of $500,000; next to a bonus fee provided to professionals hired to pursue the litigation and to the payment of the unpaid portion of the $3.0 million New Almacs Junior Subordinated Obligation; next to the repayment to New Almacs of its payments on the New Almacs Junior Subordinated Obligation; next to remaining litigation costs; and last to be split 75% to the Class 3A Claimants [the unsecured creditors] and 25% to New Almacs.”
Id. “In essence, from any recovery under the avoidance claims, the Trustee would have to pay approximately $3.0 million to the Purchaser as well as legal fees and expenses, before the unsecured creditors began to receive their 75% share of the proceeds.” Id.
Defendants argue that an avoidance recovery would not benefit the estate, because the unsecured creditors would receive none of the first several million dollars of such a recovery. Indeed, they claim, the Creditors’ Litigation and Distribution Trust is designed to allow the Purchaser to recoup its payments, rather than to benefit the unsecured creditors.
Defendants minimize the fact that the Purchaser has filed for bankruptcy protection, has not paid anything on the $3,000,000 Junior Subordinated Obligation, and that its Plan does not designate the Trustee, as claim holder for Almae’s unsecured creditors under the Junior Subordinated Obligation, for a distribution. The significance of these facts, however, is that the $3,000,000 to which the Purchaser would have been entitled under the Plan, as proceeds from a successful prosecution of these avoidance claims by the Trustee, was meant as reimbursement for the $3,000,000 that the Purchaser was to have paid on the note to the unsecured creditors. Because the Purchaser will not have paid on the note, therefore, it will not be entitled to $3,000,000 from a recovery on the present claims by the Trustee. As a result, the amount of such a recovery to which the unsecured creditors would be entitled is increased.
Defendants argue that this is irrelevant, because the Trust suffers a “fatal structural defect” in serving to benefit primarily the Purchaser. They urge the Court to focus on the first few million dollars to be distributed under the Plan, and to find that because the unsecured creditors will receive none of that amount, the estate will not benefit.
This argument misses the point entirely. Should the Trustee succeed in this action, the unsecured creditors will gain up to $33 million, less attorney’s fees.
See In re Almac’s,
Moreover, defendants’ attempt to distinguish this case from others like it on the ground that under the Plan as originally confirmed,
none
of the first several million dollars would go to the unsecured creditors cannot be taken seriously. The Trustee’s success in this action would mean that the transfers at issue would be avoided — in their entirety. The order in which the proceeds would be distributed does not change the
III. Motions to Dismiss
A. Standard for Decision
Fed.R.Civ.P. 12(b)(6) provides for dismissal where the plaintiff has failed to state a claim upon which relief may be granted. Dismissal on such grounds is appropriate only if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”
Conley v. Gibson,
In considering a motion to dismiss, a court must accept all well-pleaded factual averments as true, and draw all reasonable inferences therefrom in the plaintiffs favor.
See Negron-Gaztambide v. Hernandez-Torres,
13. Analysis
1. Choice of Law
Plaintiffs fraudulent transfer claims are based on Rhode Island’s version of the UFTA, R.I. Gen. Laws §§ 6-16-1 to 12. However, defendants argue that California’s version of the UFTA, Cal. Civ.Code § 3439, should govern. Both parties address the relevant contacts of Rhode Island and California with this ease, contending that the law of one state or the other should govern.
However, if there is no conflict between the two states’ laws, then the Court need not engage in a choice-of-law analysis. The California and Rhode Island versions of the UFTA are for all practical purposes identi-cal 9 . Defendants argue, however, that: (1) Cal. Civ.Code § 3439 does not apply to LBOs that are “above board” or not otherwise intentionally fraudulent; and (2) a creditor whose claim arises after the consummation of an LBO may not bring a constructive fraudulent transfer claim under Cal. Civ.Code § 3439.04 10 where the LBO was highly publicized and was not “actually” fraudulently concealed.
While neither the California Supreme Court nor the Rhode Island Supreme Court have considered these issues, defendants argue that Ninth Circuit cases interpreting the California Uniform Fraudulent Conveyances Act (“UFCA”) in a manner supporting their arguments represent the law of California
11
. Defendants then apparently
This Court, however, is bound to determine if a conflict in fact exists. As a federal court applying state law, the Court must attempt to determine the results to which the supreme courts of California and Rhode Island would come.
Comm’r of Internal Revenue v. Estate of Bosch,
a. The Ninth Circuit cases
In
Credit Managers Ass’n of Southern California v. The Federal Co.,
This
dicta
became the law of the Ninth Circuit in
Kupetz v. Wolf,
(1) Adashek [the buyer] formed Little Red Riding Hood (Riding Hood), a Wisconsin corporation having $100.00 in eapi-tal;
(2) Riding Hood purchased all the shares of Wolf & Vine [the corporation]from Wolf and Marmon [the sellers] for $3 million, $1.1 million paid immediately and $1.9 million to be paid in installments over the next two years;
(3) Riding Hood financed the transaction with a $1.1 million loan from the Bank and the Bank issued letters of credit in favor of the sellers for the remaining amount;
(4) Riding Hood merged into Wolf & Vine; which, as the survivor corporation, assumed the obligation of Riding Hood to the sellers, Wolf and Marmon; and
(5) Wolf & Vine pledged its assets to the Bank to secure the $1.1 million loan and the letters of credit. Thus, Adashek effectively pledged the assets of Wolf & Vine to finance his acquisition of that corporation.
Id. at 844. Wolf & Vine subsequently filed for bankruptcy under Chapter 11, and the trustee sued to avoid the LBO as a fraudulent conveyance under the UFCA. Id. The District Court 15 , finding that no creditor existed on the date the LBO closed, granted the defendant’s motion for summary judgment. Id.
On appeal, the Ninth Circuit reviewed the scant pertinent case law, and concluded that “those transactions in which all was ‘above board’ to begin with have been ‘ratified’ by the courts even though the creditors may have suffered in the end.”
Kupetz,
First, there is no evidence of any intention on the part of the selling shareholders to defraud the corporation’s creditors. Second, the selling shareholders did not know that Adashek intended to finance the purchases through an LBO. Third, the Trustee represents no creditors whose claims against the estate arose before July 31, 1979, and who did not have full opportunity to evaluate the effect of the LBO on Wolf & Vine’s creditworthiness. Fourth, the form of the transactions employed by the LBO reflects a sale by Wolf and Marmon to an entity other than Wolf & Vine.
Id. at 847-48.
With respect to the element of intent to defraud, the Ninth Circuit acknowledged that the plaintiff was suing under the constructive fraud provisions of the UFCA. The Court stated, however,
[although lack of fraudulent intent does not bar a fraudulent conveyance claim under a constructive intent provision of the law, we hesitate to utilize constructive intent to frustrate the purposes intended to be served by what appears to us to be a legitimate LBO.
Id. at 848.
Moreover, the Ninth Circuit found, even to the extent that fraudulent conveyance laws would apply to LBOs, a post-LBO creditor could not attack a well-publicized LBO.
Kupetz,
[t]he California courts do not seem to have doubted the plain language of the statute that later-arising creditors may attack conveyances that meet the other requirements of the statute 16 _ But like Judge Raf-eedie in Credit Managers, we believe this grant of standing to sue must be modified in light of an LBO in which there was no actual intent to defraud.
Id. (footnote added). The Court agreed with the dicta in Credit Managers that the California legislature “clearly” did not intend the UFCA to apply to LBOs, and that policy concerns counseled against allowing post-LBO creditors to sue. Id.
Other Ninth Circuit cases following
Kwpetz
have reiterated and explained the rules established therein.
See Lippi v. City Bank,
b. California law
The question is whether the California Supreme Court would adopt the reasoning and rule of the aforementioned cases.
In determining how (or indeed whether) the California Supreme Court would apply Cal. Civ.Code § 3439 to this LBO, the Court is guided by well-established California principles of statutory construction. The objective of statutory construction is to discern the intent of the legislature.
California Teachers Ass’n v. Governing Bd. of Rialto Unified School District,
Applying these principles to § 3439, this Court is confident that the California Supreme Court would not follow the Ninth Circuit cases, but rather would apply the statute as written. Limiting the reach of § 3439 to LBOs that are not “above-board” essentially limits fraudulent-transfer attacks on LBOs to those which are “actually” fraudulent, in effect writing the constructive fraudulent transfer provisions out of the statute when an LBO is involved. Clearly, § 3439 expressly allows constructive fraudulent transfer claims, and does not limit the application of such claims to particular
types
of transfers. The California legislature is quite capable of excepting LBOs from the reach of § 3439 if it so desires; there is no indication whatsoever that it intended to do so.
See California Fed. Savings & Loan Ass’n,
Moreover, the purported wisdom of applying § 3439 to “above board” LBOs is immaterial; the courts’ role is to apply the law as the legislature has enacted it, not as the courts would prefer it.
California Teachers Ass’n,
California case law on fraudulent conveyances does not counsel to the contrary. The California courts have clearly recognized the existence of constructive fraudulent transfer claims as distinct from actual fraudulent transfer claims.
See, e.g., Lyons v. Security Pacific Nat’l Bank,
Based on the foregoing, this Court is not persuaded that the California Supreme Court would abandon its statutory construction principles in this case and adopt a rule limiting the application of fraudulent conveyance laws to LBOs that are not “above-board” or otherwise intentionally fraudulent 17 .
With respect to the second applicable rule coming out of the Ninth Circuit eases, that post-LBO creditors may not use the constructive fraudulent transfer provision of § 3439.04 to attack a well-publicized LBO, this Court is likewise persuaded that the California Supreme Court would not craft such a rule.
§ 3439.04 is entitled “Transfers fraudulent as to present and future creditors”, and reads:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
(emphasis added). The statutory language could not be clearer; a creditor, whose claim arose before or after the transfer in question, has a cause of action “if’ the remaining statutory conditions are satisfied. Nowhere is there a list of particular types of transfers excluded from the reach of these provisions with respect to post-transfer creditors.
Again, the Ninth Circuit has essentially written the crystal-clear constructive fraudulent transfer provisions of § 3439.04 out of the statute, this time by preventing post-LBO creditors from attacking LBOs that were “well-publicized” or “not actually fraudulently concealed”, regardless of whether the actual statutory provisions are satisfied. Suffice it to say that the discussion, supra, of California’s principles of statutory construction, applies with equal or greater force here to compel the conclusion that the California Supreme Court would apply the statute as written. § 3439.04 is worded with clarity (indeed, more so than the UFCA), and it cannot be assumed that the California Supreme Court would simply ignore its proper role and eliminate portions of the statute.
Kupetz
itself appears to concede as much. While most of that decision focused on policy concerns, the Ninth Circuit briefly passed on the question of how the California Supreme Court would rule. The Court correctly found that “[t]he California courts do not seem to have doubted the plain language of the statute that later-arising creditors may attack conveyances that meet the other requirements of the statute.”
Unsurprisingly, the Ninth Circuit rules have been widely rejected elsewhere. Other courts have found fraudulent conveyance laws applicable to LBOs
21
, and allowed post-LBO creditors to use such provisions
22
. These courts have frequently alluded to the extraordinary judicial activism entailed in rewriting fraudulent conveyance laws on policy grounds
23
. Indeed, one court in the Ninth Circuit expressly noted the “tension between the- Kupetz II decision and California statutory law_”
In re Pajaro Dunes,
Finally, it is noteworthy that disagreement exists with respect to the policy rationales on which the Ninth Circuit based its rewriting of § 3439.
See, e.g., Tabor Court,
Since the Ninth Circuit decisions on this subject are federal judicial legislation at its worst, this Court concludes that the California Supreme Court would not follow them but rather would adhere to its own statutory construction principles, and leave the “modification” of § 3439 to the California legislature.
e. Rhode Island law
The foregoing analysis applies to the law of Rhode Island as well. Rhode Island’s principles of statutory construction are similar to those of California, and render it highly unlikely that the Rhode Island Supreme Court would ignore the plain language of R.I. Gen. Laws §§ 6-16-1 to 12 and follow the Ninth Circuit rule for policy reasons
24
. See, e.g., LaPlante v. Honda North America, Inc.,
Moreover, the existing body of Rhode Island law on fraudulent conveyances indicates neither a hostility to the constructive fraudulent transfer provisions of the UFTA, nor a predilection toward exempting broad classes of transfers from the statute’s reach.
In sum, for the reasons extensively detailed in the foregoing analysis of California law, the Court concludes that the Rhode Island Supreme Court would apply §§ 6-16-1 to 12 as written, and would not adopt the Ninth Circuit rule exempting “above-board” LBOs from the constructive fraudulent transfer provisions, and deny standing to post-LBO creditors in “well-publicized” LBOs.
As a result, there is no conflict of substantive law in this case. For purposes of the present motion, then, the Court rejects defendants’ argument that the constructive fraudulent transfer provisions of the UFTA do not apply to this LBO, and therefore that the Complaint must be dismissed for failure to plead actual fraud. Also rejected is defendants’ argument that a post-LBO creditor may not invoke the constructive fraudulent transfer provisions of UFTA § 4 25 .
Defendants contend that the Complaint consists merely of conclusory allegations tracking the language of the UFTA, and thus must be dismissed for failure to satisfy Fed. R.Civ.P. 9(b).
Rule 9(b) states, “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.” Rule 9(b) applies to this case, but does not exist in a vacuum. Rather, it must be read “in harmony with Fed. R.Civ.P. 8, which requires only a ‘short and plain statement of the claim showing that the pleader is entitled to relief.’”
Wieboldt Stores, Inc. v. Schottenstein,
Defendants argue first that the Complaint fails to adequately plead the element of an existing creditor prior to the LBO who remains unpaid 26 . ¶ 31 of the Complaint states:
On August 6, 1993, Almae’s commenced the Bankruptcy Cases. Almac’s has creditors with claims arising both before and after the 1991 LBO which were unpaid on August 6,1993 and remain unpaid.
This allegation is then incorporated by reference into Counts I through IV.
Defendants argue that this pleading is “insufficient as a matter of law”, because the burden of proof is on the party whose standing is questioned. Furthermore, they point to the Debtors’ schedules of unsecured creditors and contend that many of them are trade creditors whose current claims are not the same as the claims held prior to the LBO.
Plaintiff responds that no creditors need actually be named; rather, ¶31 sets forth allegations of fact which may be objectively proven or disproven, and which must be taken as true for present purposes. Nevertheless, he continues, that he has named creditors anyway, and trade creditors with revolving accounts may be considered “existing creditors” for the purposes of UFTA § 5 even if the claims they held at the time of the bankruptcy filing are not the claims they held at the time of the LBO.
The Court will not try this case on a motion to dismiss. A probing inquiry into who the creditors are, and what claims they hold, is inappropriate at this stage of the case. What matters now is the sufficiency of what is alleged, not what is proven.
The Complaint clearly satisfies the requirements of Rules 8 and 9(b).
See, e.g., Coleman v. Alcock,
Plaintiffs failure to name an existing creditor is of no moment, for he is not required to prove his ease at this point; his allegation that such a creditor exists suffices.
Coleman,
[T]he Trustee alleges he represents ‘at least one qualified, unsecured creditor holding an allowable unsecured claim which existed at the time of the LBO.... ’ Under the liberal rule of notice pleading, that allegation is enough. The Trustee need not name the creditor. Nor is it necessary that the claim held by that creditor at the bankruptcy filing be identical to the one he held at the time of the LBO.
Next, defendants argue that the Complaint is defective in pleading the elements of the debtor’s insolvency, inadequate capitalization, or inability to meet debts under the UFTA. Counts I through IV plead these issues generally; for example, ¶33 states, “Almac’s made such payments without receiving a reasonably equivalent value in exchange therefor and was engaged in or was about to engage in business or transactions for which Almac’s remaining assets were unreasonably small in relation to such business or transactions.”
Defendants argue that Rules 8 and 9(b) require greater particularity, and list specific types of facts that plaintiff should have pleaded 27 . Defendants then assert that the burden is on plaintiff to prove these elements, and proceed at length to explain why, in fact, Almae’s was not insolvent, inadequately capitalized, or unable to meet debts as they came due at the time of, or as a result of, the LBO.
Plaintiffs response is that the pleading sets forth objectively verifiable allegations of fact, which must be taken as true for purposes of a motion to dismiss.
As stated before, this Court will not try this case on the pleadings. Defendants’ extensive discussion of the substantive merits of plaintiffs claim is presently irrelevant.
What matters now is the sufficiency of this Complaint, and, for the reasons discussed sup
ra,
it is adequate.
See, e.g., Coleman,
The whole Complaint is adequate, and no portion of the Complaint will be dismissed on Rule 8 or 9(b) grounds.
3. 11 U.S.C. § 546(e): Settlement Payments
11 U.S.C. § 546(e) exempts certain categories of transfers from the reach of the trustee’s broad avoidance powers. In relevant part, § 546(e) provides that:
[T]he trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency, that is made before the commencement of the case ....
§ 741(8) 29 , in turn, defines “settlement payment” as follows:
[A] preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade ....
Defendants argue that this exception applies to exempt the transfers in connection with the LBO from plaintiffs avoidance powers, because “[i]n settlement of the sale of their stock, the Selling Defendants tendered their shares to The Yucaipa Companies, which, as the Paying Agent and Escrow Agent for the Selling Defendants, functioned as a broker or clearing agency in the context of the transaction.”
Plaintiff counters that the “settlement payment” exception is an “exceptionally narrow safe harbor”, inapplicable here because the transfers were not settlement payments made by a stockbroker.
The § 546(e) exception applies if the transfers were: (1) “settlement payments”; and (2) made “by or to” one of the enumerated entities.
Munford v. Valuation Research Corp. (Matter of Munford, Inc.),
In determining whether the transfers at issue were “settlement payments” within § 546(e), the Court looks first to the definition provided in § 741(8). This definition defies plain meaning; to the contrary, courts have recognized that it is circular and cryptic.
In re Healthco,
The securities industry utilizes a “clearance and settlement” system, wherein parties use intermediaries to make trades of public stock which are instantaneously credited, but in which the actual exchange of stock and consideration therefor takes place at a later date.
See Wieboldt II,
The intermediaries’ role in this system is critical; typically there are several layers of brokers on each side of a trade, with a clearing agency positioned in the middle. Id. The clearing agency, on the date of the trade itself, makes entries (credits or debits) in the accounts of its members (financial institutions or brokers), which reflect the trade. Id. Thus, while settlement occurs later, the trade itself is functionally instantaneous. The system depends upon a series of guarantees, made by all parties in the chain, that they will live up to their obligations regardless of a default by another party in the chain. Id. These guarantees allow the parties to trade free of worry about events between the trade date and the settlement date.
The need to preserve the stability of this system led Congress to create the § 546(e) exception to the trustee’s avoidance powers.
See Jewel Recovery, L.P. v. Gordon,
Against this background, it appears unlikely that Congress intended the term “settlement payment” to cover the present transfers. True, these transfers “settled” a purchase and sale of securities. The Tenth Circuit has held that payments made by brokers to selling shareholders in an LBO are “settlement payments” covered by the § 546(e) exception.
Kaiser Steel,
In both
Kaiser
and
Wieboldt II,
the LBOs involved the clearance and settlement system; while the respective courts split on whether the LBOs were sufficiently connected to the system to justify the application of § 546(e), the system was at least involved.
Kaiser Steel,
Here, however, the question is not nearly as close, because the system of intermediaries and guarantees was not even used. The only purported intermediary in the case, The Yucaipa Companies, was an entity inextricably linked to the rest of the Yucaipa Defendants 30 . The only possible link between this transaction and the securities industry is the fact that securities were sold; however, the stock at issue was not even publicly traded. The stock transfers thus had no connection whatsoever to the clearance and settlement system, and allowing avoidance would have no impact at all on that system. 31
Even if the transfers were “settlement payments”, however, § 546(e) does not apply because they were not made “by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency5’. Simply put, The Yucaipa Companies was none of the above. While defendants contend that The Yucaipa Companies “functioned as a broker or clearing agency in the context of the transaction”, they have made no showing whatsoever that it was in fact either 32 . Rather, as noted supra, The Yucaipa Companies was an entity inextricably linked to the rest of the Yucaipa Defendants, itself owning and selling stock in the LBO. Merely placing The Yucaipa Companies in the middle of this transaction and designating it Paying Agent and Escrow Agent does not make it a § 546(e) entity, and defendants will not escape avoidance on this basis. The words of the Court in Jewel Recovery are particularly apt:
The affirmative application of § 546(e) to this transaction would serve to sanction the practice of structuring private stock purchases in an effort to circumvent the avoidance section, merely by utilizing a financial institution. Private transactions lack the impact on the public market trading systems that Congress intended to protect by § 546(e).
The § 546(e) exception does not apply here, and the Court rejects defendants’ motion to dismiss on those grounds.
4. 11 U.S.C. § 550(d): Single Satisfaction
The next pellet in defendants’ shotgun blast of arguments is that the “single satis
Defendants’ argument turns on the resolution, by the Plan, of certain secured claims. In relevant part, the Plan resolved: (1) the secured claims of the Citicorp Defendants, arising from the security interests granted by Almac’s in exchange for the cash used to fund the LBO; and (2) the secured claims of the holders of securities issued by Almac’s to raise cash to fund the LBO. These two groups of claimants were, under the Plan, to receive pro rata shares of senior subordinated notes issued by New Almacs, as well as unsecured deficiency claims, and would be released from potential avoidance actions by the trustee on the basis of their secured claims. Defendants appear to argue that because the Plan resolved these claims, the trustee is now precluded from bringing the present avoidance action as well.
The Court need not tarry long on this issue; defendants utterly fail to explain how avoidance of the cash transfers to both sets of defendants would constitute a double recovery. The present claims are entirely distinct from those resolved by the Plan; the Plan settled potential actions to avoid the security interests held by the lenders and security holders, while the present action is for avoidance of cash transfers 34 . Again, these two sets of claims are entirely distinct, and the specter of a double recovery is simply not present. § 550(d) does not bar these claims.
Accordingly, for the reasons stated supra, defendants’ motions to dismiss are denied in their entirety. The case will proceed to the next phase — answer by defendants to the Complaint and discovery.
IV. Motion to Transfer
The question remains as to
where
the case will proceed; defendants seek a transfer to the Central District of California. 28 U.S.C. § 1404(a) states, “[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”
35
“ ‘Section 1404(a) is intended to place discretion in the District Court to adjudicate motions for transfer according to an individualized, case-by-case consideration of convenience and fairness.’ ”
Blinzler v. Marriott Int'l Inc.,
The party seeking to transfer venue under § 1404(a) bears a heavy burden.
Blinzler,
Defendants argue that the Court should not place great weight upon plaintiffs choice of forum, because plaintiff is not a resident of the forum. This Court has recognized that the strong presumption in favor of a plaintiffs choice of forum “is greatly weakened where plaintiffs chosen forum is not also his home.”
Ryan, Klimek, Ryan Partnership,
In any event, “[t]his circuit ... has not established the rule, as some other circuits have, that when plaintiffs sue in a forum that is not their residence, their choice of venue is entitled to only minimal consideration.”
Ashmore v. Northeast Petroleum Div. of Cargill, Inc.,
This Court’s opinion in Ryan, Klimek, Ryan Partnership sets forth the appropriate factors regarding transfer, as outlined by the Supreme Court:
The factors pertaining to the private interests of the litigants include [] the ‘relative ease of access to sources of proof; availability of compulsory process for attendance of unwilling, and the cost of obtaining attendance of willing, witnesses; possibility of view of premises, if view would be appropriate to the action; and all other practical problems that make trial of a case easy, expeditious and inexpensive.’ The public factors bearing on the question include [] the administrative difficulties flowing from court congestion; the ‘local interest in having localized controversies decided at home’; the interest in having the trial of a diversity case in a forum that .is at home with the law that must govern the action; the avoidance of unnecessary problems in conflict of laws, or in the application of foreign law; and the unfairness of burdening citizens in an unrelated forum with jury duty.
The private factors do not clearly call for transfer. Defendants claim that this case is simply about the 1991 LBO, and thus should be transferred to California because, inter alia, that is' where the transactions occurred, and is where the Yucaipa Defendants many witnesses and records concerning the transactions are located. 37
This is too narrow a view of the ease. Plaintiff does not dispute the essential facts of the LBO itself, but rather argues that it caused the demise of Almac’s; thus, the dispute is really over conditions and events occurring primarily in Rhode Island, rather than California. While Almac’s was a Delaware corporation, its primary place of business was Rhode Island; plaintiff asserts that most of the creditors are located here, and the bankruptcy itself proceeded here. Plaintiff submits that the Purchaser maintains possession in New York of Almac’s records, and offers the names (presumably as potential witnesses) of several former Almac’s management-level employees who reside in Rhode Island.
Thus, it is not clear that transferring this ease to California would serve a purpose other than to merely shift the inconvenience from defendants to plaintiff. Geography dictates inconvenience to someone; defendants have not established that moving the case to California would merely shift that inconvenience to plaintiff.
Moreover, defendants have not shown that the public factors warrant transfer. This Court has already devoted tremendous resources to becoming familiar with the factual background and the legal issues involved in this case, and transfer would waste scarce
The Court recognizes the inconvenience to defendants (particularly the Yucaipa Defendants) of litigating in Rhode Island. However, they cannot carry the heavy burden of showing that the balance of convenience strongly favors them. Accordingly, the Motion to Transfer Venue to Central District of California hereby is denied.
V. Conclusion
For the reasons stated above, the motions of the Yucaipa Defendants and the Citicorp Defendants to dismiss hereby are DENIED. In addition, the motion of the Yucaipa Defendants to transfer venue hereby is DENIED. The Order staying discovery, previously entered by the Court, hereby is vacated.
It is so ordered.
Notes
. This case has previously been the subject of an opinion by this writer.
See Zahn v. Yucaipa Capital Fund (In re Almac’s, Inc.),
. “Yucaipa Defendants” refers to the same group of defendants so identified in the Court’s previous opinion in this case.
See In re Almac's,
. "Citicorp Defendants” refers to the same group of defendants so identified in the Court’s previous opinion in this case.
See In re Almac's,
. William Shakespeare, Macbeth, act V, scene v.
. While the two groups of defendants’ arguments were not identical at that time, they were essentially the same. Indeed, at the hearing on these motions the Citicorp Defendants adopted all of the Yucaipa Defendants’ arguments as their own. The Citicorp Defendants made an additional argument for dismissal, discussed infra.
. While the Citicorp Defendants did not initially make this argument, they subsequently adopted it as well.
. Defendants rely heavily on the bankruptcy court's opinion in
Retail Marketing Co. v. Northwest Nat'l Bank (In re Mako, Inc.),
Moreover, defendants' assertion that "the Tenth Circuit Court of Appeals expressly adopted the bankruptcy court’s reasoning on this issue ...” is misguided. The Tenth Circuit noted in a footnote that while the bankruptcy court's opinion had been reversed in part and remanded, the bankruptcy court’s reasoning on the "appointment” prong of the § 1123(b)(3)(B) test was unaffected. Id. at 1055 n. 3. It is a stretch to assert, as defendants do, that this constitutes an "express adoption” of the bankruptcy court’s reasoning on an entirely separate issue, i.e., the "representative of the estate” prong of the § 1123(b)(3)(B) test, to which the Tenth Circuit was not referring in that footnote. While the Tenth Circuit did not reverse the bankruptcy court’s decision with respect to the “representative of the estate” prong, neither did it "expressly adopt” the “any and all” language.
. Defendants quote
Harstad v. First American Bank (In re Harstad),
. The UFTA was approved by the National Conference of Commissioners on Uniform State Laws in 1984, and has been enacted in thirty-six states. See 7A U.L.A. 639 (1985 F.Supp.1997).
. Cal. Civ.Code § 3439.04, based on UFTA § 4, 7A U.L.A. 652-53 is entitled "Transfers fraudulent as to present and future creditors”, and reads:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
.Defendants doggedly contend that these cases are "controlling”, "dispositive", “binding”, and "definitive". It is hornbook law that they are none of the above.
Comm'r of Internal Revenue
v.
Estate of Bosch,
This Court, sitting outside the Ninth Circuit, is not bound by Ninth Circuit precedent, but instead must make an independent determination of whether the California and Rhode Island supreme courts would adopt the reasoning and rule of the Ninth Circuit cases.
See Blinzler v. Marriott Int'l, Inc.,
.Defendants do argue that even if California law does not govern this case, the Court nevertheless is bound by R.I. Gen. Laws § 6-16-11 to apply California law. § 6-16-11 reads, "this chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to this subject of this chapter among states enacting it.”
. Douglas G. Baird & Thomas H. Jackson, Fraudulent Conveyance Law and its Proper Domain, 38 Vand. L.Rev. 829 (1985).
. This section read,
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the properly 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 to his actual intent.
7A U.L.A. 504.
. The district judge in Kupetz was the same judge who had issued the opinion in Credit Managers.
. The court noted that
Pope v. National Aero Finance Co.,
: Since this Court concludes that the California Supreme Court would not find that § 3439 applies only to LBOs that are not "above board”, defendants’ argument that the complaint is defective in failing to plead that the LBO at hand was not "above board” or otherwise intentionally fraudulent is rejected.
. The Ninth Circuit correctly observed that in
Pope v. National Aero Finance Co.,
. The court in Credit Managers cited nothing in support of its conclusion that the California legislature "clearly” did not intend fraudulent conveyance laws to apply to LBOs. See Jenny B. Wahl & Edward T. Wahl, Fraudulent Conveyance Law and Leveraged Buyouts: Remedy or Insurance Policy? 16 Wm. Mitchell L.Rev. 343, 367 (1990).
. See David R. Weinstein, supra at 189 ("The court clearly observed the language of former California Civil Code s. 3439.05 _[but] simply declined to apply the law.”)
.
See Tabor Court,
.
See Weinman v. Fidelity Capital Appreciation Fund (In re Integra Realty Resources, Inc.),
.
See MFS/Sun,
. Indeed, as noted
supra,
it cannot even be assumed that the Rhode Island Supreme Court would agree with the Ninth Circuit on policy grounds.
See, e.g., Tabor Court,
. Defendants’ argument in this respect appears to be tied to the argument, discussed infra, that the Complaint fails to adequately plead the existence of an existing creditor on the date of the LBO. The objective seems to be to first eliminate the standing of the trustee to assert claims on behalf of post-LBO creditors under Counts I and III, and then invalidate the pleading entirely as to pre-LBO creditors.
Defendants also attempt to engraft their desired requirement of a pre-LBO creditor for the purposes of Counts I and III onto 11 U.S.C. § 544(b), arguing that this section confers standing upon the trustee only if there is an unsecured creditor with a claim existing on both the date of the transfer and the date of the bankruptcy fifing. Defendants contend that this requirement exists as a matter of federal bankruptcy law, apart from the UFTA.
This argument is without merit. § 544(b) states, "The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim ...." The trustee’s standing is thus derivative of that of a creditor under "applicable law”, here the UFTA.
See generally 4 Collier
For the purposes of Counts I and III, the Trustee need not allege and prove that all the creditors he represents had claims existing on the date of the LBO, since the Court concludes that UFTA § 4 allows claims by a post-LBO creditor. While defendants cite cases that purportedly would impose such a requirement, these cases are inapposite because they involve underlying state laws that bar post-transfer claims.
See, e.g., SBC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.),
However, for the purposes of Counts II and IV, which are based on UFTA § 5 and require a pre-LBO creditor, § 544(b) likewise imposes such a requirement.
. Of course, in light of the foregoing analysis of the UFTA and 11 U.S.C. § 544(b), this is not required for Counts I and III. It is, however, required for Counts II and IV, which are based on UFTA § 5, R.I. Gen. Laws § 6-16-5, Cal. Civ.Code § 3439.05.
. Defendants submit that plaintiff should have alleged facts concerning the identity and fair market value of the Debtors' assets before and after the Stock Purchase; the nature and extent of the Debtors’ capital and the extent to which he believed they were undercapitalized; the amount of working capital or income which was allegedly necessary to maintain the Debtors as a going concern; the identity and amount of the Debtors' liabilities; the source, if any, of any working capital for the Debtors; and the actual cash (low of the Debtors and their gross and net profit margins.
. The cases cited by defendants are inapposite. They stress the undisputed proposition that Rule 9(b) requires particularity in pleading as to the acts alleged to be fraudulent, so as to place a defendant on notice of the charges, and prevent fishing expeditions by plaintiffs seeking to discover, rather than prove, their cases.
See Gindi v. Silvershein,
. The definition of “settlement payment” in 11 U.S.C. § 101(51A) applies to the forward contract trade.
. "These business entities and individuals are interrelated. For example, Ronald W. Burkle, Mark Resnik [now deceased] and Richard d’Abo are partners of The Yucaipa Companies; the general partners of The Yucaipa Capital Fund are Yucaipa Capital Advisors, Inc. and The Yu-caipa Companies; and Joe S. Burkle is the general partner of Almac’s Partners, L.P.” In re Almac's, 202 B.R. at 650 n. 1.
. This may also be inferred in part from defendants’ failure to argue that the Yucaipa Companies, as the "Paying Agent and Escrow Agent for the Selling Defendants”, was not an "initial transferee” under 11 U.S.C. § 550 and thus immune from the trustee’s attack. As several courts have noted, true conduits who do not take beneficial ownership in securities in LBOs may
Such an argument has not been made here; indeed, defendants, while arguing that the Yucai-pa Companies "functioned as” a broker or clearing agency "in the context of the transaction”, elsewhere in their brief admit that the Yucaipa Companies owned and sold Almac’s stock in the LBO. Memorandum in Support of Yucaipa Defendants’ Motion to Dismiss Complaint or to Transfer Venue to Central District of California, at 2 n. 2. Clearly, then, these transfers did not entail the chain of intermediaries and guarantees which characterize the clearance and settlement system.
. 11 U.S.C. § 101(53A) defines "stockbroker” as follows;
"stockbroker” means person — •
(A) with respect to which there is a customer, as defined in section 741 of this title; and
(B) that is engaged in the business of effecting transactions in securities—
(i) for the account of others; or
(ii) with members of the general public, from or for such person’s own account ....
11 U.S.C. § 741(2), in turn, reads:
"customer” includes—
(A) entity with whom a person deals as principal or agent and that has a claim against such person on account of a security received, acquired, or held by such person in the ordinary course of such person’s business as a stockbroker, from or for the securities account or accounts of such entity-
(i) for safekeeping;
(ii) with a view to sale;
(iii) to cover a consummated sale;
(iv) pursuant to a purchase;
(v) as collateral under a security agreement; or
(vi) for the purpose of effecting registration of transfer; and
(B) entity that has a claim against a person arising out of—
(i) a sale or conversion of a security received, acquired, or held as specified in sub-paragraph (A) of this paragraph; or
(ii) a deposit of cash, a security, or other property with such person for the purpose of repurchasing or selling a security ....
Finally, 11 U.S.C. § 101(48) defines "securities clearing agency” as a “person that is registered as a clearing agency under section 17A of the Securities Exchange Act of 1934 or whose business is confined to the performance of functions of a clearing agency with respect to exempted securities, as defined in section 3(a)(12) of such Act for the purposes of such section 17A ....”
. 11 U.S.C. § 550(d) provides that "[t]he trustee is entitled to only a single satisfaction ...” of an avoidance claim.
. Moreover, the Plan expressly distinguished the two sets of claims, not only providing for the present action, but doing so as the primary means for recovery by the unsecured creditors.
. 28 U.S.C. § 1412 states: "A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.” The analysis is the same as under § 1404(a).
In re Spillane,
.Because defendants did not object to venue in their motions to dismiss, such objection is waived under Fed.R.Civ.P. 12(h)(1). It is therefore only the convenience of venue that is open to challenge.
. The Citicorp Defendants are not California residents, but do business there.