On October 12, 2022, the U.S. Bankruptcy Court for the Southern District of New York denied motions to dismiss fraudulent transfer claims asserted against certain investors in Tops Holding II Corporation. In 2007, a group of private equity investors, led by Morgan Stanley Investment Management, Inc., purchased the stock of supermarket operator Tops Holding. Notwithstanding its poor financial performance and rapidly increasing pension liability, the company, under the management of its private equity owners, paid the owners $105 million in dividends in 2009, $30 million in dividends in 2010, $100 million in dividends in 2012, and $141.9 million in dividends in 2013. Following Tops Holding’s 2018 bankruptcy filing, the litigation trust established in the bankruptcy brought a $375 million fraudulent transfer lawsuit against Morgan Stanley and the other investors claiming that the investors ran the company into bankruptcy by paying themselves lavish dividends while Tops Holding was insolvent, amassing significant debt, and unable to pay its pension liabilities. In response, the investors filed motions to dismiss, claiming, among other things, that the company was solvent when the dividends were paid and that the trustee failed to show the investors had any intent to defraud.

The court disagreed with the investors, concluding that the allegations “plausibly support” that Tops Holdings paid over $300 million in dividends between 2009 and 2013, at which time the company was insolvent. Additionally, the court found that the complaint alleged that the investors possessed the intent to defraud creditors by manipulating third-party valuations used to support the dividend payments. Under the Bankruptcy Code and applicable New York law, a transfer from a debtor is deemed “constructively fraudulent” if the transfer is made without “fair consideration” and if, among other things, the “transferor is insolvent or will be rendered insolvent by the transfer in question” or “the transferor believes that it will incur debt beyond its ability to pay.” Similarly, a transfer is considered “intentionally fraudulent” if the transferor made the transfer with the “actual intent . . . to hinder, delay, or defraud” present or future creditors. The court concluded that the trustee adequately pleaded claims for constructive and intentional fraudulent transfers and thus allowed the litigation against Morgan Stanley and the remaining investors to proceed.

The case is Halperin v. Morgan Stanley Investment Management, Inc. (In re Tops Holding II Corp.), No. 20-ap-8950 (Bankr. S.D.N.Y. Oct. 12, 2022). The litigation trustee is represented by McKool Smith, P.C. Morgan Stanley is represented by O’Melveny & Myers LLP. The opinion is available here.