On February 26, 2012, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware (the “Court”) denied a motion to dismiss a complaint for failure to state a claim in the adversary proceeding captioned EPLG I, LLC, as Trustee for the QR Liquidating Trust v. Citibank, National Association, Adv. Pro. No. 11-50603. The Court denied the Motion to Dismiss because (i) the payments in question were not protected by the safe harbor provisions of section 546(e); (ii) a factual matter regarding Citibank’s status as a secured creditor could not be determined on a motion to dismiss; and (iii) the Complaint identified the party that deposited the funds that comprised the alleged preferential transfers. The Court also rejected Citibank’s setoff and fraudulent conveyance arguments because they required factual determinations that could not be made on a motion to dismiss.
By way of background, the Debtors borrowed over $33 million through the issuance of industrial revenue bonds. The Debtors obligation under the bonds was secured by a Letter of Credit issued by Citibank in favor of the Indenture Trustee. The Debtors agreed to reimburse Citibank if the Letter of Credit was drawn down and granted Citibank liens on certain assets to secure the reimbursement obligation. After a series of one-year renewals, Citibank declined to renew the Letter of Credit, triggering the Indenture Trustee’s right to draw down on the Letter of Credit. In turn, the Debtors deposited (the “Deposit”) funds into their Citibank account to satisfy the obligation to reimburse Citibank for the Letter of Credit. Subsequently, Citibank debited (the “Debit”) the account and paid certain funds to the Indenture Trustee to retire the bonds.
The Liquidating Trustee in the Debtors case filed a Complaint to recover the Deposit and Debit as preferential transfers and fraudulent conveyances and Citibank moved to dismiss. Citibank argued that the Deposit and Debit were settlement payments protected by section 546(e) of the Bankruptcy Code. The Court rejected the argument because both payments were independent obligations that were not made in connection with a securities contract. Citibank also argued that its secured creditor status prevented it from receiving a preference because it would not receive more than it would have received pursuant to a chapter 7 liquidation. The Court held that the determination of Citibank’s secured status was a factual issue that was premature for decision on a motion to dismiss. Additionally Citibank argued that the Complaint deficiently pled the identity of the transferor. The Court also rejected this argument finding that the Complaint alleged that “QR”, Qimonda Richmond, LLC, made the Deposit.
The Court held that Citibank’s final two arguments required factual determinations that could not be decided on a motion to dismiss. Citibank’s argument that section 553(b) did not apply again relied on a disputed fact – whether Citibank was a fully-secured creditor. Similarly Citibank’s argument that the Deposit and an additional pledge of collateral were avoidable as fraudulent transfers required the Court to determine a factual matter-whether Citibank provided “reasonably equivalent value”.