August 27, 2021
Delaware Bankruptcy Court Finds That Waiver by Debtor in DIP Financing Order Prevents Chapter 7 Trustee From Pursuing Fraudulent Transfer Claims in Place of the Creditor’s Committee
Written by: Steve D. Adler
On May 5, 2021, Delaware Bankruptcy Court Judge Brendan Shannon issued an opinion in Official Comm. Of Unsecured Creditors ex rel. Bankr. Estates of Jevic Holding Corp. v. Cit Group/Business Credit Inc. (In re Jevic Holding Corp.), No. 08-51903, 2021 WL 1812665 (Bankr. D. Del. 2021), holding that a Chapter 7 trustee, as successor to the debtors, could not substitute for a dissolved creditors’ committee in an adversary proceeding to pursue fraudulent transfer claims based on the terms of the DIP financing order, which barred the debtors from pursuing such claims.
On December 31, 2008, the Official Committee of Unsecured Creditors (the “Committee”) filed an adversary proceeding against CIT Group (“CIT”), as agent, and certain lenders (the “Lender Group”), alleging claims against the Lender Group relating to a pre-bankruptcy leveraged buyout and subsequent refinancing of the debt incurred in relation to such buyout (the “LBO Litigation”).
In 2018, the bankruptcy case was converted to a Chapter 7 case and George L. Miller was appointed as the Chapter 7 trustee. On April 12, 2019, the trustee filed a motion, pursuant to Fed. R. Civ. P. 25(c), to substitute himself for the then-dissolved Creditors’ Committee as plaintiff in the LBO Litigation against CIT and Sun Capital Partner Inc. (“Sun”). CIT and Sun each filed an objection to the motion to substitute along with motions for judgment on the pleadings.
In the motion to substitute, the trustee asserted that he was the “real party in interest” and that his interest in recovering assets for the debtors’ estates was perfectly aligned with those of the Committee. CIT and Sun argued in response that the Chapter 7 trustee succeeds only to the rights, claims and defenses of the debtors, not the Committee. Therefore, CIT and Sun asserted that the trustee could not be substituted as the plaintiff because the debtors previously waived their right to challenge liens and assert claims against the Lender Group in the final DIP order.
The trustee replied that the motion to substitute did not rely on a transfer of the Committee’s interests because the adversary proceeding claims belonged to the debtors’ estates and, upon conversion to Chapter 7, those claims vested in the trustee. The trustee also argued that the debtors’ waiver of claims in the DIP order was subject to the right of parties in interest to pursue challenges during the investigation period. Since an interested party – the Committee – filed a proceeding during the investigation period, the trustee asserted that he succeeded to that litigation as a party in interest.
Judge Shannon disagreed with the trustee. Overall, the Court found that pursuant to the DIP order, the debtors waived their right to challenge the senior DIP lenders’ claims and liens or to assert any claims against them, subject to the rights of other parties in interest to assert timely claims within the applicable challenge period.
Judge Shannon found that although DIP order provided parties in interest with a limited right to file causes of action against the Lender Group, that right expired and was separate from the Committee’s right. Further, the language of the DIP order granted rights to the Committee that were not transferable to the Chapter 7 trustee, who was bound by the provisions in the DIP order applicable to the debtors.
The Court further reasoned that the language of the DIP order “provided that the Debtors’ stipulations and admissions were binding upon any successor to the Debtors including a Chapter 7 trustee in all circumstances.” And allowing the trustee to pursue the LBO Litigation would deny any legal consequence to this very specific language.
The Court also held that Sun held subrogee status to the rights of CIT as a prepetition lender, even though Sun was neither a prepetition lender or agent. As a subrogee to the rights of CIT, Sun received the protection of the language in the DIP order, which waived the claims against the lenders.
On May 5, 2021, Delaware Bankruptcy Court Judge Brendan Shannon issued an opinion in Official Comm. Of Unsecured Creditors ex rel. Bankr. Estates of Jevic Holding Corp. v. Cit Group/Business Credit Inc. (In re Jevic Holding Corp.), No. 08-51903, 2021 WL 1812665 (Bankr. D. Del. 2021), holding that a Chapter 7 trustee, as successor to the debtors, could not substitute for a dissolved creditors’ committee in an adversary proceeding to pursue fraudulent transfer claims based on the terms of the DIP financing order, which barred the debtors from pursuing such claims.
On December 31, 2008, the Official Committee of Unsecured Creditors (the “Committee”) filed an adversary proceeding against CIT Group (“CIT”), as agent, and certain lenders (the “Lender Group”), alleging claims against the Lender Group relating to a pre-bankruptcy leveraged buyout and subsequent refinancing of the debt incurred in relation to such buyout (the “LBO Litigation”).
In 2018, the bankruptcy case was converted to a Chapter 7 case and George L. Miller was appointed as the Chapter 7 trustee. On April 12, 2019, the trustee filed a motion, pursuant to Fed. R. Civ. P. 25(c), to substitute himself for the then-dissolved Creditors’ Committee as plaintiff in the LBO Litigation against CIT and Sun Capital Partner Inc. (“Sun”). CIT and Sun each filed an objection to the motion to substitute along with motions for judgment on the pleadings.
In the motion to substitute, the trustee asserted that he was the “real party in interest” and that his interest in recovering assets for the debtors’ estates was perfectly aligned with those of the Committee. CIT and Sun argued in response that the Chapter 7 trustee succeeds only to the rights, claims and defenses of the debtors, not the Committee. Therefore, CIT and Sun asserted that the trustee could not be substituted as the plaintiff because the debtors previously waived their right to challenge liens and assert claims against the Lender Group in the final DIP order.
The trustee replied that the motion to substitute did not rely on a transfer of the Committee’s interests because the adversary proceeding claims belonged to the debtors’ estates and, upon conversion to Chapter 7, those claims vested in the trustee. The trustee also argued that the debtors’ waiver of claims in the DIP order was subject to the right of parties in interest to pursue challenges during the investigation period. Since an interested party – the Committee – filed a proceeding during the investigation period, the trustee asserted that he succeeded to that litigation as a party in interest.
Judge Shannon disagreed with the trustee. Overall, the Court found that pursuant to the DIP order, the debtors waived their right to challenge the senior DIP lenders’ claims and liens or to assert any claims against them, subject to the rights of other parties in interest to assert timely claims within the applicable challenge period.
Judge Shannon found that although DIP order provided parties in interest with a limited right to file causes of action against the Lender Group, that right expired and was separate from the Committee’s right. Further, the language of the DIP order granted rights to the Committee that were not transferable to the Chapter 7 trustee, who was bound by the provisions in the DIP order applicable to the debtors.
The Court further reasoned that the language of the DIP order “provided that the Debtors’ stipulations and admissions were binding upon any successor to the Debtors including a Chapter 7 trustee in all circumstances.” And allowing the trustee to pursue the LBO Litigation would deny any legal consequence to this very specific language.
The Court also held that Sun held subrogee status to the rights of CIT as a prepetition lender, even though Sun was neither a prepetition lender or agent. As a subrogee to the rights of CIT, Sun received the protection of the language in the DIP order, which waived the claims against the lenders.