It appears that the latest effort to undo a failed leveraged buyout is about to get underway. Boston Generating LLC filed bankruptcy in August 2010 in the wake of a failed leveraged buyout. A plan was confirmed in August 2011, which established a liquidating trust whose only assets are litigation claims, including claims against the former equity holders whose membership units were repurchased and warrants were redeemed as part of the buyout.
Under the plan, unsecured creditors had an option to transfer to a liquidating trust any state law causes of action that they might have had with respect to the leveraged buyout. Not surprisingly, they all did, and on August 17, 2012, the Liquidating Trustee filed a complaint that has continued to remain under seal, which (according to other pleadings in the Chapter 11 case) seeks to recover up to $1 billion. The Liquidating Trustee has been pursuing discovery against certain defendants even though the complaint has not been made public. Recent activity in the case suggests that the complaint will be served on all of the defendants soon.
The plan device of assigning purported state law claims to the Liquidating Trust suggests that the Liquidating Trustee intends to pursue constructive fraudulent transfer claims, among others, against the former equity holders. This is the latest episode in the continuing saga of bankruptcy professionals trying to evade protections provided by Bankruptcy Code Section 546(e), which bars a bankruptcy estate from bringing constructive fraudulent transfer claims that would unwind certain large securities transactions. These provisions are designed to protect public securities holders from this type of litigation, at least when brought by a bankruptcy estate. Although the safe harbor protection has been successfully defended in the Enron commercial paper case, see In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011), and the Quebecor private placement case, see In re Quebecor World (USA) Inc., 453 B.R. 201 (Bankr. S.D.N.Y. 2011), aff’d, 480 B.R. 468 (S.D.N.Y. 2012), the stakes make it too tempting for frustrated creditors to resist. Creditors in the Tribune and Lyondell, bankruptcy cases have brought similar actions. Motions to dismiss, which focus primarily on a federal pre-emption theory, are pending in both cases. The results will provide important guidance for the litigants in the Boston Generating litigation.1
Boston Generating, like the earlier cases, will pose the basic question of whether clever structuring by insolvency professionals can enable disappointed creditors to evade the safe harbor provided by Section 546(e) for those that participate in the securities markets. But it may do so in a more challenging way. The Boston Generating creditors have used a modified structure, evidently seeking to correct some of the technical shortcomings that made the earlier cases vulnerable to the preemption defense. Thus, Boston Generating may present a greater challenge to defendants, more sharply testing certain secondary defenses presented in Lyondell and Tribune.
Please contact Hal Horwich or Sabin Willett if you would like to discuss these developments further.
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1 Bingham has played and is playing a leading role in each of these cases and has focused on the development of alternative, non-preemption grounded defenses.
This article was originally published by Bingham McCutchen LLP.