Ogle v. Morgan, et al
- Summarized by Caleb Chaplain , U.S. Bankruptcy Court for the Western District of Virginia
- 5 months 2 weeks ago
- Case Type:
- Case Status:
- Affirmed in part and Reversed in part
- 20-10908 (5th Circuit, Oct 07,2022) Published
- The Fifth Circuit affirmed dismissal of the constructive fraud claims related to the settlement releases because the Delaware judgment established that reasonably equivalent value was given in exchange for the releases. The Fifth Circuit affirmed that plaintiff failed to adequately plead actual fraud. The Fifth Circuit further found that claim preclusion did not bar plaintiff’s claims under “a straightforward application of Delaware preclusion law.” However, plaintiff failed to sufficiently plead fraud as to the $2.5M transaction fee but had properly plead actual fraud as to a $27.5M payment.
- Procedural context:
- Plaintiff filed a complaint to avoid releases under a settlement and payments made under a corporate acquisition. The bankruptcy court granted defendants’ motion to dismiss. The bankruptcy court concluded that the constructive fraud claims as to the settlement releases ran afoul of the Rooker-Feldman doctrine. The bankruptcy court further concluded the complaint failed to satisfy the heightened pleading standard for actual fraud. And finally, the bankruptcy court dismissed the claims challenging the corporate acquisition payments, concluding the plaintiff was enjoined by the Delaware judgment from prosecuting such claims. On appeal, the district court affirmed.
- The facts underlying the complaint revolve around (i) Erickson Air-Crane, Inc.’s acquisition of Evergreen Helicopters, Inc. (“the Evergreen Transaction”) and (ii) the subsequent settlement of a class action and derivative suit brought by the shareholders in Delaware state court related to the Evergreen Transaction.
In May 2013, Erickson had purchased Evergreen Helicopters, Inc. from Evergreen International Aviation, Inc. for $250 million. The “crippling debt financing” to make the purchase included a cash component of $185 million, a $17.5 million unsecured promissory note, and convertible preferred stock valued at $47.5 million. Of import to the appeal, Erickson used this transaction to make an “early payment” of $27.5 million on “unsecured obligations” to ZM Entities, which were under “de facto control” of two board members of Erickson. Centre Lane Partners, a private equity firm also under the control of those two board members, received $2.5 million in fees for its work on the Evergreen Transaction.
Based on this transaction, shareholders brough a class action and derivative suit in Delaware state court, asserting breach of fiduciary duties and unjust enrichment, among other claims. The parties through mediation ultimately settled the suit. The Delaware state court, after conducting a fairness hearing, approved the settlement. The settlement provided that the defendants would pay $18.5 million, which was allocated 80% to the shareholder class and 20% to Erickson. In exchange, the defendants received releases of the claims against them.
Two months after the settlement was approved by the Delaware state court, Erickson filed a chapter 11 petition.
The Litigation Trustee for the Erickson Litigation Trust, which was formed under the debtor’s chapter 11 plan, filed a complaint seeking avoidance and recovery of the shareholder derivative releases as actual or constructive fraudulent transfers under 11 U.S.C. §§ 544, 548, and 550. The Litigation Trustee argued that the settlement was inappropriate because the value received by the company was well below the value of the company’s claims against the defendants and because the releases were “part of a nefarious, unspoken quid pro quo.”
The complaint also sought avoidance and recovery of payments made in connection with the Evergreen Transaction under §§ 544(b) and 550. In support, the Litigation Trustee attempted to show the way conflicted board members had helped set up a bad deal for Erickson that left the company on the brink of financial ruin.
- Jones and Southwick
ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!