- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 23-20386 (5th Circuit, Aug 14,2024) Published
- Tag(s):
-
- Ruling:
- In this direct appeal, the U.S. Court of Appeals for the Fifth Circuit (Circuit) affirmed the ruling of the U.S. Bankruptcy Court for the Southern District of Texas (BC) that the trustee for two trusts created in the bankruptcy of Black Elk Energy Offshore Operations (BE) could recover $10.3 million transferred by Mark Nordlicht, the owner of BE's controlling shareholder, from the proceeds of a sale of BE's valuable assets to Shlomo and Tamar Rechnitz (Rechnitzes), long-time investors in Nordlicht's hedge fund and subscribers to the fund Nordlicht created for the purchase of the BE shares.
- Procedural context:
- The bankruptcy plan of BE, which took effect July 25, 2016, established Liquidation and Litigation Trusts (Trusts), administered by one trustee (Trustee) and respective Trust committees. Since then, the Trustee has sought to recover the funds Nordlicht transferred to investors in the special-purpose entity—Platinum Partners Black Elk Opportunities Fund LLC (PPBEO)—Platinum, the hedge fund he had founded and for which he served as the chief investment officer, had created to purchase the Series E preferred equity shares issued by BE in 2013 (Shares). In March 2019, the Trustee brought an adversary proceeding against the Rechnitzes.
Meanwhile, the deadlines set in the Trusts' founding agreements (Agreement) approached. Thus, in December 2019, the Trustee moved to extend the dissolution deadline for both Trusts. Numerous parties, including the Rechnitzes, opposed the motion. They argued both Trusts dissolved by their own terms in July 2019, three years after the bankruptcy plan took effect. The BC disagreed, concluding the Trust Agreements’ three-year time limit was “not self-executing” and required “[a]n act of dissolution,” which had not occurred. Because the Trustee had not sought an extension within the time specified by the Agreements, however, the BC did not grant the motion but instead approved an amendment to the Agreements, thus extending the dissolution date. The Rechnitzes appealed that decision to the district court, but when that court dismissed their appeal on the basis of the person-aggrieved standard, they declined to appeal to the Circuit.
With the Trusts extended, the Rechnitzes’ adversary proceeding continued. Ultimately, the BC granted the Trustee partial summary judgment, rejecting their good faith defense, and used its own tracing methodology.
The Circuit granted the parties’ joint petition for direct appeal.
- Facts:
- Nordlicht was the founder and chief investment officer of Platinum Partners (Platinum), a New York-based hedge fund, which became the controlling shareholder in BE, a Houston-based oil and gas company. Needing cash after years of mismanagement, Black Elk issued the Shares; PPBEO purchased the majority, if not all, of the Shares. Although Shlomo Rechnitz worried this opportunity might be “too good to be true,” the Rechnitzes nonetheless invested $10 million in PPBEO. In PPBEO’s subscription and LLC agreements, the Rechnitzes made PPBE Holdings, another Platinum entity, their agent.; PPBE Holdings’ managing member was Nordlicht. Shlomo Rechnitz understood that PPBE Holdings and Nordlicht would be “handling and managing the [PPBEO] investment” for them.
By 2014, BE was insolvent. In response, Nordlicht devised a plan to pay PPBEO’s investors rather than paying back BE's substantial debts. Platinum installed a new Black Elk CFO, who sold Black Elk’s best assets to Renaissance Offshore for $125 million. With the Renaissance proceeds, Platinum, through the new CFO, planned to redeem the Shares instead of paying Black Elk’s senior secured bondholders or substantially overdue trade creditors. This strategy allowed Platinum to benefit through a priority position in BE's anticipated bankruptcy, but Platinum would first need to subordinate the bonds to the Shares, as Renaissance proceeds would otherwise go to BE's senior secured bondholders first. To win such subordination, Platinum simply "rig[ged] the vote." With the bonds subordinated, Nordlicht’s scheme could proceed. Once BE received the Renaissance proceeds in August 2014, it sent $77,497,077 to Platinum to buy back the Shares from the Platinum entities then holding them. . The Platinum entities then bought the Black Elk bonds held by PPBEO. This allowed PPBEO to pay its investors while simultaneously placing Platinum in a priority position in Black Elk’s ensuing bankruptcy. Thereafter, Nordlicht began paying PPBEO’s investors, including the Rechnitzes who were paid back their principal, plus interest, by September 2014.
In 2016, BE filed for bankruptcy.
- Judge(s):
- Kyle S. Duncan; Jennifer W. Elrod; and Irma C. Ramirez
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