In re GenOn Mid-Atlantic Development, L.L.C.

Case Type:
Case Status:
21-20557 (5th Circuit, Jul 29,2022) Published
Finding that the district court had jurisdiction and that abstention was not required, the Court entered a take-nothing judgment on an investment bank's breach of warranty claims against the debtor, holding that the debtor's one-time payment for a letter of credit from the bank did not create a lien.
Procedural context:
The Court affirmed the District Court's order adopting the Bankruptcy Court's report and recommendation to partially dismiss claims for implied covenants and reformation under Rule 12; and to grant summary judgment on the remaining claims for breach of warranty and indemnification.. Abstention was not required on these related-to claims because (a) diversity jurisdiction would have permitted the suit to be filed in federal district court;; and (b) the outcome of the litigation had a "huge potential effect" on consummation of the debtor's confirmed Chapter 11 plan. Because of the potential impact on implementation or execution of the debtor's confirmed plan, the bankruptcy court's post-confirmation exercise of jurisdiction was appropriate.
The debtor paid the lender for pre-petition services, and separately paid the lender a $1.4M service fee for a letter of credit to secure the debtor's lease obligations for two coal-fired power plants. The debtor subsequently defaulted on rent payments, and the lessor counter-parties drew down $130M against the letter of credit. The purchase agreement omitted an intended cap on permitted aggregate draws under the letter of credit, the effect of which was that the lender was obligated to pay the lessors more than the $130M that the debtor had paid to the lender. The lender sued the debtor in state court, alleging four related contract law theories predicated on claims that the purchase agreement created a lien, which violated the debtor's agreement with the pre-petition lessors and therefore, the debtor's warranty to the lender to not breach it's underlying lease agreement. Post-petition, the debtor removed the litigation to the bankruptcy court. Because the purchase agreement included the debtor's agreement to unconditionally renounce any "interest, claim, reversionary or residual interest" in its $130 million payment to the lender, as well as a warranty stating that the agreement did not create a lien, the Court found that no lien on the debtor's other assets existed and the lenders claims could not survive summary judgment.
Smith, Wiener, and Southwick

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