In Re: Boston Generating, LLC

Background

Mark Holliday, the liquidating trustee of the Boston Generating, LLC Liquidating Trust, appealed a Bankruptcy Court decision dismissing counts one through four of the trustee’s Third Amended Complaint. Those counts asserted New York state-law fraudulent conveyance claims. The trustee did not appeal dismissal of the unjust-enrichment claim.

The claims arose from a 2006 leveraged recapitalization transaction involving EBG Holdings LLC and Boston Generating, LLC. BostonGen and EBG borrowed funds to finance a tender offer, a unit buyback, a warrant redemption, and a $35 million distribution to EBG members. U.S. Bank acted as BostonGen’s depositary and received and distributed funds according to BostonGen’s instructions. Approximately $708 million was transferred to fund the unit buyback, warrant redemption, and member distribution, and approximately $35 million was distributed to EBG members.

The Bankruptcy Court concluded that the challenged transactions fell within Section 546(e) of the Bankruptcy Code, which protects certain securities-related transfers from avoidance in bankruptcy. It also concluded that Section 546(e) preempted the trustee’s state-law fraudulent conveyance claims. The trustee appealed to the District Court.

Relevant legal standard

The District Court reviewed the Bankruptcy Court’s legal conclusions independently and its factual findings for clear error. The District Court could affirm on any ground supported by the record.

The relevant transfer

The trustee argued that the relevant transfer was only the transfer from U.S. Bank to EBG’s Bank of America account. The District Court rejected that transaction-by-transaction approach. Relying on the Supreme Court’s decision in Merit Management Group, LP v. FTI Consulting, Inc., the court held that the relevant transfer is the overarching transfer the trustee seeks to avoid, not an isolated component of an integrated transaction.

Because the trustee asserted New York fraudulent conveyance claims, New York law helped define the transfer being challenged. Under that law, an allegedly fraudulent conveyance must be evaluated in the context of the overall plan when the transfer is one step in that plan. The court therefore treated the broader BostonGen Transfer, rather than only the BofA transfer, as the relevant transfer. The court reasoned that the broader transfer was integral to the leveraged recapitalization and was made to fund the tender offer.

Section 546(e) safe harbor

Section 546(e) prevents a bankruptcy trustee from avoiding certain transfers that are settlement payments or transfers made by, to, or for the benefit of a financial institution in connection with a securities contract.

The District Court held that the BostonGen Transfer was a settlement payment because it was a cash transfer made to complete the tender offer. The court also held that it was made in connection with a securities contract because the borrowing and distribution of loan proceeds were directly related to and associated with the tender offer. The court rejected the trustee’s argument that the transfer should be viewed as an ordinary dividend or examined without considering the surrounding transaction.

The court further held that BostonGen was a protected financial institution under Section 101(22) of the Bankruptcy Code. U.S. Bank was a bank and trust company; BostonGen was U.S. Bank’s customer because it retained U.S. Bank to act as depositary and distribute the funds; and U.S. Bank acted as BostonGen’s agent because BostonGen authorized and controlled the relevant distributions. The court therefore concluded that BostonGen qualified for the Section 546(e) protection.

The court separately held that the $35 million distribution was also protected. It was a cash transfer made to complete, and directly related to, the tender offer under the leveraged recapitalization plan. The fact that the distribution occurred before the purchase of units and was paid to all members did not remove it from the safe harbor.

Preemption of state-law claims

The District Court held that Section 546(e) preempted the trustee’s state-law fraudulent conveyance claims. It relied on the Second Circuit’s decision in In re Tribune Co. Fraudulent Conveyance Litigation, which the court treated as binding. The court held that both constructive and intentional fraudulent conveyance claims were preempted when they sought to avoid transfers protected by Section 546(e).

The court rejected the trustee’s argument that the exception in Section 546(e) for certain federal intentional-fraud claims showed that state-law intentional-fraud claims remained available. It reasoned that the federal exception did not create an exception for state-law claims and that allowing such claims would undermine the Bankruptcy Code’s goal of providing certainty and stability in securities markets.

Disposition

Judge George B. Daniels affirmed the Bankruptcy Court’s June 18, 2020 memorandum opinion and June 19, 2020 order dismissing the appealed fraudulent conveyance claims. The Clerk of Court was directed to close the bankruptcy appeal.