Forum Selection Clause Did Not Apply To Core Matter; Motion To Dismiss Denied.
Charys Liquidating Trust v. McMahan Securities Co. (In re Charys Holding Company, Inc.), Case No. 08-10289 (BLS), Adv. No. 10-50213 (BLS) (August 27, 2010) (J. Shannon)
On or about October 11, 2006, Charys Holding Company, Inc. (“Charys”) entered into an agreement (the “Engagement Letter”) with McMahan Securities Co. (“McMahan” or “Defendant”) whereby McMahan agreed to serve as Charys’s “exclusive financial advisor and placement agent” in connection with a private placement by Charys of up to $150 million in senior convertible notes (the “Notes”). The Engagement Letter also provided McMahan the option, which McMahan exercised, to place an additional 15% on the amount of the offering. Charys later entered into an indenture agreement with the Bank of New York Mellon Trust Company, N.A., as trustee, and then issued $201,250,000.00 of Notes (the “McMahan Financing”).
Pursuant to the Engagement Letter, McMahan was to receive a fee of 4% of the gross proceeds of a placement up to $75 million, and 5% of aggregate gross proceeds in excess of $75 million, for a total of $9,312,500.00 on the proceeds, which equaled $201,250,000.00. However, McMahan withheld $9,957,000.00 from Charys’s portion of the initial proceeds of $175 million and $1,434,635.42 from Charys’s portion of the additional proceeds of $26,250,000.00 (collectively, the “Transfers”), for a total of $11,391,635.42.
Charys, along with Crochet & Borel Services, Inc. (together, the “Debtors”), filed for bankruptcy on February 14, 2008 (the “Petition Date”). Once the plan was confirmed, two trusts (the Charys Liquidating Trust and the C&B Liquidating Trust, collectively referred to as the “Trusts” or the “Plaintiffs”) were established and certain of the Debtor’s assets, including avoidance actions, were transferred to the Trusts. The Trusts instituted the instant adversary proceeding on February 12, 2010, in which it sought the difference between the amount agreed upon and the amount transferred to McMahan and alleged that McMahan’s fees exceeded the prevailing market rate for comparable investment banking services.
McMahan responded with a motion to dismiss, arguing that that: (1) the Engagement Letter contained a forum selection clause requiring the action to be commenced and litigated in Connecticut state court; (2) Charys failed to plead sufficient facts to establish its claims; and (3) Charys’s admission that the Transfers were made on account of an antecedent debt proved that the Transfers were in exchange for reasonably equivalent value. The Trusts filed a response and an amended complaint. McMahan filed a reply, and the Court declined to hear oral argument on the matter.
The Court denied the Defendant’s motion to dismiss on all counts. First, Defendant argued that the forum selection clause necessitated litigation of the Trust’s claims in Connecticut. The Court evaluated this contention under Connecticut law. See Diaz Contracting Inc. v. Nanco Contracting Corp., 817 F.2d 1047, 1050 (3d Cir. 1987) (law of the state whose law governs construction of the contract at issue “generally applies to the determination whether to enforce a forum selection clause unless a significant conflict between some federal policy or interest in the use of state law exists.”). Connecticut, in turn, has adopted the standards espoused by the Supreme Court in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), pursuant to which “a forum selection clause is prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.” Id. at 10. A forum selection clause may be unreasonable if: (i) it is the result of fraud or overreaching; (ii) serious inconvenience would result from litigating in the selected forum; or (iii) enforcement would result in contravention of a strong public policy in the selected forum. Id. at 15-17.
Notwithstanding the preference for enforcement of forum selection clauses, it was an open question as to whether such clauses were applicable in “core” bankruptcy proceedings. The Court found its answer in Astropower Liquidating Trust v. Xantrex Tech. Inc., 335 B.R. 309, 328 (Bankr. D. Del. 2005), in which the court refused to enforce a forum selection clause because, most significantly, the fraudulent transfer claims did not arise from the relevant contract, but rather arose by operation of statute. Persuaded by the reasoning used by the court in Astropower, the Court disregarded the forum selection clause because: (i) Plaintiffs’ claims were core matters arising by operation of statute and not from a pre-petition contract; (ii) the viability of Plaintiff’s claims depended on factors other than the terms of the Engagement Letter and the parties’ conduct, such as Charys’s financial condition at the time of the Transfers; and (iii) policy issues, such as the bankruptcy policy of considering issues affecting the estate and the fact that the action, at least in part, arose to protect creditors who were not parties to the Engagement Letter, favored litigating the matter in the Bankruptcy Court.
Second, Defendant argued that Charys’s Complaint failed to allege sufficient facts regarding the services provided by McMahan and why such services did not constitute reasonably equivalent value, and establishing the Debtors’ insolvency at the time of the transfers. In order to survive the motion to dismiss, Plaintiffs’ claims were required to allege sufficient facts to plausibly show: (i) a transfer within the applicable two-year time period; (ii) Charys’s insolvency; and (iii) a lack of reasonably equivalent value. The Court held that: (i) the Transfers were made within the two-year time period; (ii) Charys sufficiently plead its insolvency, notwithstanding the fact that its consolidated balance sheet showed net assets in excess of liabilities if goodwill was taken into account, because Charys claimed that going-concern opinions issued by independent accountants rendered the goodwill valueless; and (iii) the complaint adequately alleged a lack of reasonably equivalent value because it alleged that the fees were in excess of what was allowed under the Engagement Letter, were greater than those charged by investment banks for similar engagements, and were provided for substandard work performed by McMahan.
The Court disregarded McMahan’s argument that In re APF Co., 308 B.R. 183 (Bankr. D. Del. 2004) compelled the determination that payments made pursuant to the terms of a mutually agreed-to contract are per se transfers for reasonably equivalent value by distinguishing APF on the basis that the Transfers at issue in the instant case were on account of, and allegedly in excess of, a pre-petition contract, not a promissory note.
Accordingly, for all the reasons stated more fully hereinabove, the Court denied the Defendant’s motion to dismiss.
