On August 3, 2022, the U.S. Bankruptcy Court for the District of Delaware partially dismissed fraudulent transfer claims asserted by the chapter 7 trustee for Bayou Steel against Black Diamond Capital Management (and affiliates), the debtor’s sponsor and lender. The trustee sought to avoid and recover a $30 million distribution of sale proceeds and liens securing a $33 million term loan—on the ground that the transfers precipitated Bayou Steel’s bankruptcy and were made in bad faith.
The court denied the motion to dismiss the distribution-based claim, rejecting Black Diamond’s argument that the claim was time-barred under Delaware’s three-year statute of repose. While such claims would be barred outside of bankruptcy, the court reasoned, Bankruptcy Code section 546(a)—which extends the time for debtors to file such claims if the applicable time limitation has not expired at the time of the bankruptcy filing—preempted Delaware’s statute of repose. The court also rejected the argument that the distribution was protected under the safe harbor for transfers in connection with securities contracts set forth in Bankruptcy Code section 546(e) because of the attenuated connection between the sale transaction and subsequent distribution. The court found that the distribution was not expressly contemplated in the sale agreement or exclusively comprised of sale proceeds based on the facts alleged in the complaint.
The court dismissed the lien-avoidance claim. To show a constructive fraudulent transfer, the trustee argued the debtor did not receive reasonably equivalent value for the liens it granted Black Diamond merely because the loan was allegedly “not in arms-length or made in bad faith.” Principally, the trustee argued the loan was only necessary because of the earlier $30 million distribution to Black Diamond, which, according to the trustee, should be a relevant factor in assessing reasonably equivalent value. The court, however, strongly disagreed, stating that a “lack of good faith or failure to transact at arms’-length cannot affect th[e] math,” adding that the court was unaware of any case supporting the trustee’s argument. As to the actual fraudulent transfer claims, the court concluded certain alleged facts—namely that Black Diamond provided rescue financing on a subordinated basis to the debtor’s existing term and revolving facility—contradicted the trustee’s argument that the loan and related liens were entered into for the purpose of frustrating the rights of debtor’s existing creditors. The court thus dismissed the claim, as well as related unjust enrichment claims, with leave to replead.
The case is Miller v. Black Diamond Capital Mgmt. (In re Bayou Steel BD Holdings), No. 21-ap-51013 (Bankr. D. Del. 2022). The chapter 7 trustee is represented by Pachulski Stang Ziehl & Jones LLP and Kaufman, Coren & Ress, P.C. Black Diamond is represented by Fox Rothschild LLP, Robbins, Russell, Englert, Orseck & Untereiner LLP, and Zaiger LLC. The independent directors are represented by Benesch, Friedlander, Coplan & Aronoff LLP. The order is available here.
