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Motion to Dismiss Complaint Granted in Part Because Ordinary Course Defense Presented an Insuperable Barrier to Recovery by the Litigation Trustee

On October 31, 2012, Judge Mary F. Walrath of the United States Bankruptcy Court for the District Court of Delaware issued a Memorandum Opinion in Ronald S. Gellert, as Successor Litigation Trustee of the Crucible Materials Corporation Creditor’s Litigation Trust v. Coltec Industries, Inc. f/k/a Colt Industries, Inc., Adv. Pro. No. 11-531884, granting defendant Coltec Industries, Inc.’s (“Coltec” or the “Defendant”) motion to dismiss, in part, the Litigation Trustee’s complaint that sought to: (i) avoid and recover certain preferential, fraudulent and unauthorized post-petition transfers associated with bond payments made by the Debtor that benefited the Defendant; and (ii) disallow any claims held by the Defendant in accordance with 11 U.S.C. § 502.  The Court held that Litigation Trustee’s complaint failed to state a claim pursuant to 11 U.S.C. §§ 547, 548 and 549.  Notably, the Litigation Trustee’s preference claim was dismissed because Coltec’s ordinary course defense presented an “insuperable barrier” to recovery.  The Litigation Trustee’s related claims to recover the value of the transfers at issue pursuant to 11 U.S.C. § 550 and to disallow the Coltec’s claims § 502(d) were also dismissed.   At the same time, the Court denied Coltec’s motion to dismiss with respect to the Litigation Trustee’s count seeking contribution from the Defendant for the Debtor’s CERCLA liability.

As a result of a 1985 purchase agreement between the corporate predecessor of the debtor, Crucible Materials Corporation (the “Debtor”) and Coltec, the Debtor was responsible for all of Coltec’s obligations on certain pollution control revenue bonds issued by Onondaga County, New York and under a financing lease agreement related to newly constructed pollution control facilities.  Despite the Debtor’s assumption of the obligations related to the bonds, Coltec also remained obligated to Onondaga County for their repayment.  Additionally, Coltec was required to indemnify the Debtor for certain costs and damages related to any CERCLA violations.  The Debtor managed the pollution facilities and made principal and interest payments on the bonds until it filed for bankruptcy in 2009.  The Debtor then sold its assets, including the pollution facilities, for a purchase price of $8,000,000 of which approximately $2.7 million was paid to satisfy the bonds in accordance with the Court’s sale order.

The Litigation Trustee’s complaint sought to avoid interest payments made by the Debtor to the county as preferences and fraudulent transfers and to recover the amount of the sales proceeds paid to satisfy the bonds from Coltec.  Coltec conceded that it benefited from the satisfaction of the bonds by the Debtor as its guarantee was extinguished.  However, in its motion to dismiss, Coltec argued that the payments qualified as payments made in the ordinary course of business.  The Litigation Trustee responded that an affirmative defense like the ordinary course of business defense raises questions of fact that cannot be considered in the context of a motion to dismiss.  The Court disagreed and held that where the affirmative defense appears on the face of the complaint and presents an “insuperable barrier to recovery by the plaintiff,” the claim may be dismissed.

The Court found that the allegations of the Litigation Trustee’s complaint established that the Debtor made periodic payments in the ordinary course for over twenty-five years and dismissed the preference claim.  The fraudulent transfer claim was dismissed because the Litigation Trustee failed to provide any facts to support the conclusion that the payments were made while the Debtor was insolvent and it was clear that the payments were made for reasonably equivalent value.  The unauthorized post-petition transfer claim was dismissed because the Court’s sale order approved of the payment of sale proceeds to the county to satisfy the bonds.   The Court determined Coltec’s incidental benefit from the satisfaction of the bonds did not make the final bond payment an unauthorized transfer.

Finally, the Court addressed Coltec’s argument that the Litigation Trustee could not recover for certain cleanup and response costs under section 107 of CERCLA.  Coltec did not dispute the claim for contribution under section 113(f) of CERCLA but did argue it was not required to pay cleanup costs because the Debtor did not incur such costs but rather only reimbursed others for the cleanup costs they incurred.  The Court held the claim to recover CERCLA cleanup and response costs survived the motion to dismiss because the Complaint alleged facts sufficient if proven to establish that the Debtor incurred costs as part of environmental clean-up.

A copy of the Court’s opinion can be found here.

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