MEMORANDUM

Re: Adv. D.I. 11

LAURIE SELBER SILVERSTEIN, Bankruptcy Judge.

Defendants have filed a motion to dismiss or stay this adversary proceeding ("Motion to Dismiss").1 Briefing is complete2 and I heard oral argument on December 6, 2018.

While the Complaint (Dkt. No. 1) describes the history of Millennium Laboratories LLC ("Millennium") in some detail, the facts necessary to determine this motion as gleaned from the Complaint can be summarized as follows.3

On April 16, 2014, Millennium borrowed $1.775 billion from a group of mutual funds, hedge funds and institutional investors in exchange for the issuance of certain term loan notes ("2014 Transaction"). Millennium received the term loan proceeds, net of a $35.3 million fee ("Fee"), of which $19,415,000 was paid to Defendant J.P. Morgan Chase Bank, N.A. ("JPMNA"), $12,355,000 was paid to Defendant Citibank N.A., $1,765,000 was paid to Defendant BMO Bank Harris N.A. and $1,765,000 was paid to Defendant SunTrust Bank. As contemplated in the loan documents, that same day the remaining term loan proceeds were used (x) to retire existing debt owed to certain lenders (including JPMNA) in the amount of $304 million, (y) to repay existing debentures in the amount of $196 million to equity holder TA Associates, and (z) to pay $1.2 billion in dividends and/or bonuses (collectively, "Dividend") to TA Associates, ML Holdings II (the other equity holder) and Millennium's managers and officers (collectively defined in the Complaint as the "Controlling Persons").

In his Complaint, Plaintiff Marc S. Kirschner as Trustee of the Millennium Corporate Claim Trust ("Trustee" or "Plaintiff") formed under the confirmed plan of reorganization in Millennium's bankruptcy case4 sues Defendants to recover the Fee. In Count I of the Complaint, Trustee alleges that the transfer of the Fee constitutes an actual fraudulent conveyance under § 548(a)(1)(A) of the Bankruptcy Code5 and he seeks to recover from each Defendant its share of the Fee as an initial transferee. Trustee alleges that Millennium borrowed the funds, and paid the Fee, for the express purpose of funding the Dividend to the Controlling Persons with no regard for how the loan would be repaid, and thus, with the intent to hinder, delay or defraud creditors.

In Count II of the Complaint, Trustee alleges that the transfer of the Fee constitutes a constructive fraudulent conveyance under § 548(a)(1)(B). Trustee alleges that Millennium did not receive reasonably equivalent value for the payment of the Fee when considering the Dividend to the Controlling Persons such that, by definition, Millennium received no benefit from the transaction. Trustee further alleges that Defendants knew about the uses of the loan proceeds, and, indeed, that JPMNA affiliate J.P. Morgan Securities LLC ("JPM Securities"), suggested Millennium consider the leveraged loan and resulting dividend (together with a syndication of the term loan) as its financing vehicle. Trustee alleges that JPM Securities together with Citibank affiliate Citibank Global Markets Inc. led the process to obtain a favorable rating, and that Defendants created a confidential investor memorandum ("CIM") to market the loan. Trustee alleges that, all the while, Defendants were in a position to know, and did know, that Millennium's operations were the subject of investigations by the Department of Justice for violation of the Stark Law and the federal kickback statute and that Millennium had been sued under applicable qui tam statutes by several relators, and separately by a competitor alleging improper billing practices. Trustee alleges, therefore, that Millennium incurred the obligation to pay the Fee and paid it (x) at a time when it was insolvent, or thereby rendered insolvent and for less than reasonably equivalent value; (y) when it was engaged in a business or transaction or was about to engage in a business or transaction for which its remaining property was an unreasonably small capital; or (z) when it intended to incur or believed it would incur debts beyond its ability to pay as they matured.

In the Motion to Dismiss, brought under Rule 12(b)(6),6 Defendants request that I dismiss Count I on two grounds: (i) that Plaintiff does not plead the confluence of badges of fraud and (ii) misstatements or omissions in the marketing materials for the term loan cannot form the basis for an actual fraudulent conveyance action. Defendants request that I dismiss Count II of the Complaint because Plaintiff has not sufficiently alleged lack of reasonably equivalent value for three reasons: (i) the Complaint does not contain allegations that the Fee was not market value for services provided, (ii) the use of the term loan proceeds to pay the Dividend cannot form the basis for avoidance of the Fee (i.e. Plaintiff is focusing on the wrong transaction), and (iii) Plaintiff has not otherwise pled lack of reasonably equivalent value.

My job on a Rule 12(b)(6) motion is to review the complaint to determine whether the plaintiff has adequately pled facts sufficient to show that the plaintiff "has a `plausible claim for relief.'"7 In reviewing the complaint under Rule 12(b)(6), the court must first accept all well-pled facts as true, but may disregard legal conclusions.8 "A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."9 It is not sufficient to plead "[t]hreadbare recitals of the elements of a cause of action[] supported by mere conclusory statements. . . ."10 Rather, "a complaint . . . must contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory."11 A court draws on "its judicial experience and common sense" to determine if the complaint meets these requirements.12 The moving party has the burden.13

Discussion

Actual Fraudulent Conveyance

In Count I, Trustee seeks to avoid the payment of the Fee pursuant to § 548(a)(1)(A), which provides a trustee with the power to avoid any transfer made with actual intent to hinder, delay or defraud creditors.14 To avoid a transfer, a plaintiff must show that a transfer of an interest in property was made by a debtor, within two years before the bankruptcy, and with actual intent to hinder, delay or defraud creditors.15 Intent of the transferor and not the transferee is what has to be established.16

A fraudulent transfer claim has to be pled with specificity pursuant to Federal Rule of Civil Procedure 9(b) made applicable by Federal Rule of Bankruptcy Procedure 7009.17 Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally."18 Allegations of "date, place or time" fulfill the requirement to plead the circumstances constituting fraud or mistake with particularity, though plaintiffs are free to use alternative means to "inject[] precision and some measure of substantiation into their allegations of fraud."19 Fraudulent intent, however, may be pled generally.20 Moreover, in general, "[t]he requirements of Rule 9(b) are relaxed and interpreted liberally" where the plaintiff is a trustee and not the debtor itself.21

Defendants' argument that Plaintiff has not adequately pled the confluence of badges of fraud is a challenge to Plaintiff's pleading of intent. Actual intent to defraud is usually not susceptible to direct evidence; courts therefore may rely on circumstantial evidence to infer such intent.22 This circumstantial evidence often takes the form of badges of fraud.23 But, badges of fraud is just one substitute for direct evidence. A court may consider factors other than badges of fraud in its analysis.24 For example, "[i]f the `natural consequence' of a debtor's action" is to hinder, delay or defraud creditors, a court may infer an intentional fraudulent conveyance.25

While I agree with Defendants that Plaintiff has not sufficiently alleged a confluence of badges of fraud,26 taking all facts in the Complaint as true and drawing all reasonable inferences in favor of Plaintiff, I conclude that Plaintiff has adequately pled intent to hinder, delay or defraud creditors in the incurrence of the obligation to pay the Fee, and perhaps in the payment of the Fee itself. Specifically, I point to the following:

Defendants counter, drawing inferences from other facts alleged in the Complaint, that Millennium's advisors did not believe the challenges to Millennium's business practices were significant enough to negatively affect Millennium and, thus, Millennium did not have the requisite intent.

I conclude that the allegations in the Complaint are sufficiently detailed for pleading purposes. Seeking to maximize amounts paid to the Controlling Persons to improve their personal fortunes may evidence an intent to hinder, delay or defraud creditors and may show motivation to engage Defendants (and thus incur the obligation to pay the Fee) in order to obtain the term loan proceeds to award the Dividend. Further, Millennium's assessment of the litigation prospects relative to the magnitude of the 2014 Transaction may also evidence an intentional fraudulent transfer. Other allegations in the Complaint, such as the advice provided by certain of Millennium's advisors, may ultimately tend to disprove Plaintiff's case, but these statements do not directly contradict or completely negate the above allegations.28 I will not dismiss the Complaint on this ground.29

Constructive Fraudulent Conveyance

Plaintiff also seeks to avoid the transfer of Millennium's property — the Fee — under the Bankruptcy Code's constructive fraudulent conveyance statute, § 548(a)(1)(B). Unlike an actual fraudulent conveyance, stating a claim for a constructive fraudulent conveyance does not require a showing of intent. To establish a constructive fraudulent conveyance, the movant — by a preponderance of the evidence — has to show that the alleged transfer involved the debtor's interest in property, the transfer took place within two years of filing for bankruptcy, the transfer caused the debtor to be insolvent or the debtor was insolvent at the time of the transfer, and, lastly, the debtor did not receive any value or the value received was not reasonably equivalent to the value of the property given. The Motion to Dismiss Count II is based only on the position that Plaintiff has not sufficiently pled lack of reasonably equivalent value. Accordingly, I need not discuss the remaining factors.

The Bankruptcy Code does not define the term "reasonably equivalent value." "[T]he Third Circuit has noted that `a party receives reasonably equivalent value for what it gives up if it gets `roughly the value it gave.'"30 To determine if Millennium received reasonably equivalent value, courts do a two-part inquiry: (i) "whether the debtor received any value [for the transfer] at all," and (ii) if so, whether that value was "reasonably equivalent" to the value of the transfer.31 To survive a motion to dismiss, Plaintiff does not have to meet the heightened standard of Rule 9(b), however, he has to do more than parrot the statutory elements of § 548(b)(1)(B).32 In other words, Plaintiff has to provide Defendants with fair notice of the charges against them.33

As stated above, Defendants make three arguments: (i) the Complaint contains no allegations that the Fee was not market value for services provided; (ii) Defendants wrongly focus on the Dividend payment as the underlying basis for the avoidance of the Fee; and (iii) Plaintiff has not otherwise pled lack of reasonably equivalent value.

As to failure to plead that the Fee was not market value, Defendants are correct. Nowhere in the Complaint does Plaintiff allege that the Fee was not market value. However, that is not definitive. In R.M.L., the Third Circuit examined the bankruptcy court's conclusion that a debtor's payment of a facility fee to its bank did not confer reasonably equivalent value on the debtor because the commitment letter was so conditional that the debtor had little chance of obtaining the loan. The Third Circuit specifically found no conflict between that conclusion and the bankruptcy court's observation that the commitment fee was market rate.34 Thus, a payment to a bank of a market-based fee is not equivalent to a receipt of value. As in R.M.L., it is possible, based on specific circumstances, that the existence of market-based fee is not case-dispositive. While Defendants attempt to distinguish R.M.L. on its facts and point to the fee letter and the commitment letter, both of which are referenced in the Complaint (though perhaps not relied upon) and speak to services to be performed by Defendants and/or affiliated entities, this response simply raises a factual issue, not to be decided on a motion to dismiss.

What Plaintiff does allege in the Complaint is as follows:

Again, taking all facts in the Complaint as true and drawing all reasonable inferences in favor of Plaintiff, Plaintiff has placed Defendants on notice of his theory of the case — Millennium did not receive value reasonably equivalent to the Fee it obligated itself to pay and paid in the 2014 Transaction because at the end of the day, the 2014 Transaction provided no value to Millennium. Whether this is true, or not, is not a decision for today.

Defendants also question the propriety of judging the value given in exchange for the Fee in the context of the 2014 Transaction. Defendants state that to do so is an improper use of the collapsing doctrine. Plaintiff takes the position that use of the collapsing doctrine is unnecessary, but in any event, Plaintiff meets the requisites for its use.

The Third Circuit has recognized the collapsing doctrine in the context of assessing a defendant's liability on a fraudulent transfer claim.35 In Tabor, the Third Circuit "explained that where a series of transactions were all `part of one integrated transaction,' a court could look `beyond the exchange of funds' in one transaction and consider the `aggregate transaction.'"36 A leveraged buyout (LBO) transaction is the archetypical transaction in which the collapsing doctrine is employed by the courts.

To determine whether the collapsing doctrine should be applied to a series of transactions, courts look to the substance rather than to the form of the transactions.37 In other words, the court focuses on the overall financial consequences of the transactions and how they impact creditors.38 Courts consider three factors in their analysis. "First, whether all of the parties involved had knowledge of the multiple transactions. Second, whether each transaction would have occurred on its own. And third, whether each transaction was dependent or conditioned on other transactions."39

Assuming the need to use the collapsing doctrine,40 Trustee has pled sufficient facts to demonstrate that incurring the obligation to pay and/or payment of the Fee may be a proper transfer to collapse with the loan of funds and the payment of the Dividend. Trustee does not need to prove his case at this time. Rather, the question is whether Trustee is entitled to develop and present evidence to support his claim that the separate transfers are part of one transaction that may be considered in the aggregate to establish Defendants' fraudulent transfer liability.41 I conclude that Trustee is so entitled.42

At argument, Defendants' counsel suggested that the purpose behind considering the transfers as one transaction fails here.43 Specifically, counsel argued that the collapsing doctrine, and perhaps a fraudulent conveyance action, generally, should not be brought for the benefit of parties to the challenged transactions. Counsel pointed out that the initial beneficiaries of the Corporate Trust were the lenders to whom the term loan was syndicated, not unrelated unsecured creditors. He argued such parties should not be able to recover on a fraudulent conveyance theory. Similarly, I questioned whether Trustee can seek to avoid the Fee on a theory that it was part of the 2014 Transaction when he does not seek to avoid the obligations which form the basis of the term loan.44 I also questioned the proper remedy given the New York Action. These and other potential defenses were not the subject of the Motion to Dismiss. I will not consider these arguments until, if ever, they are properly before me and I have the benefit of briefing.

Trustee has adequately pled lack of reasonably equivalent value. The Motion to Dismiss Count II is denied.

The Adversary Proceeding Will Not Be Stayed

Defendants alternatively ask that I stay the adversary proceeding in favor of the New York Action if the Motion to Dismiss is denied. Defendants argue that if the plaintiff in the New York Action succeeds on his claims there, § 546(e) (the safe harbor provision) will provide Defendants with a complete defense to this action. In other words, Defendants argue that if the term loan was found to be a security, the Fee would constitute transfers made in connection with a securities contract and thus safe from avoidance. Plaintiff counters with multiple arguments, including that the premise of Defendants' position is incorrect in that, in the New York Action, it need not be proven that the loan itself is a security, only the syndication of it; the New York Action addresses state Blue Sky laws, not what constitutes a security under federal law; and the outcome of the New York Action would not affect my analysis of § 546(e). Needless to say, Defendants contest that any part of the 2014 Transaction constituted the issuance of a security.

There might be some efficiencies in staying this action (an argument Defendants did not make), but I will not stay it on the strength of a potential defense that may be raised if the plaintiff in the New York Action is successful. That case is also in its infancy, and it appears that both should proceed on their separate tracks.

Conclusion

For the reasons set forth above, the Motion to Dismiss is denied. An order will enter.