- Case Type:
- Case Status:
- 19-31009 (5th Circuit, Dec 04,2020) Not Published
- The United States Court of Appeals for the Fifth Circuit (Circuit) affirmed the denial by the United States Bankruptcy Court for the Western District of Louisiana (BC), previously affirmed by the relevant United States District Court (DC), of the adversary complaint, filed by the trustee for German Pellets Louisiana LLC (GPLA or Debtor), seeking avoidance of the latter’s transactions with Wessel GmbH Fordertechnik und Pelletierenlagen (Wessel) related to the construction of a Louisiana wood-pellet manufacturing plant as constructively fraudulent transfers under § 548 and state law per § 544.
- Procedural context:
- In 2018, after his appointment as Liquidating Trustee for GPLA, Craig Jalbert (Trustee) brought the adversary proceeding underlying this appeal before the BC. The Trustee in part sought to avoid and recover the five disputed payments in accordance with provisions in the Bankruptcy Code and the Louisiana Civil Code. While the Trustee originally argued that the five payments were truly fraudulent transfers within the meaning of 11 U.S.C. § 548(a)(1)(A), he changed tactics before trial: conceding that the payments were not actual fraud, he now attacked them as constructively fraudulent under § 548(a)(1)(B). Subsequently, the parties jointly stipulated that the BC should also determine whether the SO was itself a constructive fraudulent transaction. The Trustee further brought a revocatory action under article 2036 of the Louisiana Civil Code via § 544(b), arguing that the five payments were avoidable because they increased GPLA’s insolvency. After trial, BC issued a judgment in favor of Wessel. On the issue of constructive fraud, it first concluded that a binding contract existed between the parties. It then determined that the five disputed payments made by GPLA to Wessel were for reasonably equivalent value for two reasons: they were made to satisfy antecedent debt retroactively sanctioned by the SO, and GPLA obtained reasonably equivalent value from Wessel “in the form of the expected future benefit of Phase II . . . .” It further held that the payments did not increase GPLA’s insolvency under Louisiana law because they were payments on antecedent debt. Notably, the BC did not deal with whether the SO constituted a separate transaction. The Trustee appealed to the DC. Sitting in an appellate capacity, this tribunal affirmed from the bench the BC’s decision for the same reasons laid out in its decision. The Trustee then timely appealed to the Fifth Circuit, which responded with this opinion.
- The plan necessitated phased construction. Louisiana Pellets Inc. (LP) owned property in Urania, Louisiana, intended for a solid-waste disposal and wood-pellet manufacturing facility. In pursuit of this goal, LP engaged GPLA to oversee the construction and eventually operate the completed facility. For a variety of practical reasons, the parties uncreatively divided the former task into Phase I, also called “Line A,” and Phase II, also called “Line B.” Before construction began, GPLA contracted Wessel first to construct conveying and cooling equipment and then to provide related services for both phases. In February 2014, after GPLA encountered financial difficulties, GPLA and Wessel agreed to modify the contract through a First Change Order (FO). This change order limited construction to Phase I, relieved GPLA of its obligation to pay Wessel for equipment or services related to Phase II, and reduced the total contract price by nearly half. Despite these changes, Wessel continued to perform design and manufacturing work at the direction of GPLA’s technical department on the understanding “that it was a matter of when, not if, the second stage of construction would resume.” As to this Phase II-related work, Wessel sent GPLA two invoices, one on September 26, 2014, for €200,000 and another on December 9, 2014, for €400,000. In December 2014, for services indicated on the first invoice, Wessel received a payment of €200,000 from GPLA—the first of five disputed payments. After Wessel completed its work for Phase I, the parties agreed to a Second Change Order (SO) in April 2015. This order provided that portion of the original Phase II would be reinstated, renamed Line B1, and implemented a payment milestone schedule, which scheduled delivery of the Line B1 equipment after roughly 90% of the €3,600,000 total had been paid. Shortly after executing the SO, GPLA’s parent company paid Wessel €400,000 for services indicated on the second invoice, the second disputed payment. This entity issued three additional payments of €200,000 each between August and September 2015. Unfortunately, GPLA never obtained a completed Line B1, nor Phase II, because both GPLA and Louisiana Pellets filed for Chapter 11 bankruptcy in February 2016.
- Patrick E. Higginbotham; Jennifer W. Elrod; and Catharina Haynes
Victor Kearney v. Unsecured Creditors Committee
Summarizing by Amir Shachmurove
3217 in the system
1 Being Processed