The PAH Litigation Trust v. Water Street Healthcare Partners L.P. et al.,
Filing
22
MEMORANDUM ORDER re 1 MOTION for Leave to Appeal and 4 PETITION for Certification of Direct Appeal to the U.S. Court of Appeals are DENIED. Signed by Judge Leonard P. Stark on 12/21/17. (ntl)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re PHYSIOTHERAPYHOLDINGS, INC., et al.,
Debtors.
PAH LITIGATION TRUST,
Chapter 11
Banlcr. Case No. 13-12965-KG
(Jointly Administered)
Adv. Proc. No. 15-51238-KG
Plaintiff,
Misc. No. 16-201-LPS
v.
WATER STREET HEALTHCARE
PARTNERS LP., et al.,
Defendants.
MEMORANDUM ORDER
Having reviewed the papers submitted in connection with Defendants' motion for leave
to appeal (D.I. 1, 18) (the "Motion for Leave") the Bankruptcy Court's Memorandum Opinion
and Order1 (the "Interlocutory Order"), which granted in part and denied in part Defendants'
motion to dismiss (Adv.· D .I. 106)2 the above-captioned adversary pro.ceeding, and Plaintiffs
opposition thereto (D.I. 13); and having reviewed the papers submitted in connection with
Defendants' petition for certification of direct appeal to the United States Court of Appeals for
the Third Circuit (D.I. 4, 18) (the "Petition") and the opposition thereto (D.I. 14); and having
reviewed the notices of subsequent authority (D.I. 16, 20);
IT IS ORDERED that the Motion for Leave and Petition (D.I. 1, 4) are DENIED for the
reasons that follow:
1
PAH Litig. Trust v. Water St. Healthcare Partners L.P., et al. (In re Physiotherapy Holdings,
Inc.), 2016 WL 3611831 (Banlcr. D. Del. June 20, 2016).
2
The docket of the adversary proceeding, PAH Litig. Trust v. Water Street Healthcare Partners
L.P., Adv. No. 15-51238-KG, is cited herein as "Adv. D.I. _." The Chapter 11 docket, In re
Physiotherapy Holdings, Inc., et al., No. 13-12965-KG, is cited herein as "B.D.I. _."
1. Introduction. Defendants seek leave to appeal the Interlocutory Order which granted
in part and denied in part their motion to dismiss an adversary proceeding initiated by the P AH
Litigation Trust (the "Trust" or "Trustee"), as the authorized representative of the Debtor's
estate. The Trustee's complaint asserted eight fraudulent transfer claims against numerous
: defendants including Water Street Healthcare Partners, L~P. ("Water Street") and Wind Point
Partners IV, L.P. ("Wind Point") (collectively, the "Defendants" or the "Controlling
Shareholders") and certain subsequent transferees. The complaint seeks to recover $248.6
million in payments made to the Controlling Shareholders and other selling shareholders (the ·
"Selling Shareholders") in exchange for their equity in Physiotherapy Holdings, Inc.
("Physiotherapy" or the "Debtor"). Trustee alleges that in order to finance the sale of
Physiotherapy, the buyer's ("Court Square" or the "Purchaser") merger subsidiary issued $210
million in senior secured notes (the "Secured Notes"). Pursuant to the terms of the transaction,
the Debtor assum.ed the Secured Notes and certain other liabilities. Physiotherapy issued the
Secured Notes pursuant to an offering memorandum (the "OM"), which the Trustee alleges
fraudulently overstated the Debtor's revenue stream and its overall firm value. According to the
complaint, the Purchaser ultimately acquired an insolvent company, and the Secured Noteholders
received debt instruments worth far less than their face value. The Trustee alleges that this
sequence of events led to the Debtor's chapter 11 petition and seeks to claw back certain
payments made to the Selling Shareholders under both state and federal fraudulent transfer law.
2. Background. The Interlocutory Order sets forth the relevant background, including
allegations contained in the complaint:
The Debtor is a leading provider of outpatient physical
therapy services throughout the United States. Compl. if 3. 3
Defendants Water Street and Wind Point are private equity funds
3
Adv. D.I. 1.
2
whose portfolio companies consist of businesses in the healthcare
sector. Compl. if 2. As of 2012, the Debtor operated
approximately 650 clinics in 33 different states and derived the
majority of its revenue from outpatient rehabilitation services.
Def.'s Br. 14.4 In 2007, Defendant Water Street acquired
Physiotherapy for roughly $150 million. Id. Shortly after the
transaction closed, Water Street entered into an agreement (the·
"2007 Merger") to merge the Debtor with Benchmark Medical,
Inc. ("Benchmark"), an "outpatient physical therapy chain that
. Wind Point had previously acquired." Id. Following the 2007
Merger, Water Street owned 45% of the common stock of the
surviving entity while Wind Point held a 3 5% ownership stake. Id.
Throughout the next five years, the Controlling Shareholders
gradually increased their ownership to approximately 90% of the
Debtor's common shares. Compl. ~~ 14, 16. The Trustee alleges
that during this time, Water Street and Wind Point engaged in
various forms of accounting fraud in order to overstate
Physiotherapy's financial health and reap a substantial profit from
the· sale of their shares. Id.
The alleged fraud began as a result of the 2007 Merger as
the Debtor was faced with numerous operational challenges arising
from the Controlling Shareholders' efforts to integrate the
accounting systems of Benchmark and Physiotherapy. Compl. if 3.
According to the Trustee, "[t]here were delays in implementing a
new single accounting system to replace the various legacy
systems; there were problems keeping up with cash collections;
and there were almost no internal financial reporting controls." Id.
The Complaint further alleges that the Debtor began to overstate its
EBITDA, net revenue, and accounts receivable in 2010 in order to
conceal these problems. Compl. if 4.
By 2009, Physiotherapy's financial condition had
deteriorated significantly. Compl. if 36. In response, the
Controlling Shareholders allegedly began to implement new
strategies in order to sell [Physiotherapy] by 2011 or 2012 and
maximize the potential sales consideration. Compl. if 37. One
particular strategy was to abandon the "look back method" of
revenue recognition and adopt the more controversial "rate bridge
method." Compl. if 39. Physiotherapy's board was, according to
the Trustee, aware of and sanctioned the use of the rate bridge
method. Compl. if 43. According to the Complaint, the rate bridge
method estimates revenue by calculating "a 'net rate per visit'
based on the prior month's net rate per visit-which was, at the
time, based on an estimate - and adjusted upward or downward
4
Adv. D.I. 107.
3
based on supposed increases and/or decreases to the published
rates and assumptions about the amount Physiotherapy could
charge per visit or per 'unit."' Compl. if 40. Unlike the look back
method, the rate bridge method is not based on actual historical
collections and may be subject to manipulation. Compl. ifif 41-42.
[Allegedly,] within six months of switching to the rate bridge
method, the Debtor's management became aware that
[Physiotherapy's] net revenue had been overstated. Compl. if 44.
Nonetheless, it continued to apply this revenue recognition
methodology.
The marketing process formally began in October 2011
when the Controlling Shareholders solicited bids from more than
100 potential buyers. Compl. if 45 .... As participants dropped
out of the auction process, Water Street and Wind Point allegedly
pressured the Debtor's senior management into "manipulat[ing]
Physiotherapy's net revenue and patient visit counts so that
Physiotherapy could be marketed as a company that was able to
grow its net revenue per visit year over year." Compl. if 47. The
Complaint specifically details six forms of alleged accounting
fraud that enabled the Defendants to inflate Physiotherapy's
earnings. Compl. ifif 48-54.
The Trustee also quotes numerous emails from the Debtor's
billing and collections vendor indicating that the Debtor was
instructing them to falsifyits financial statements. Compl. if 55.
During this time, the Debtor began to develop substantial cash·
shortfalls as a result of these procedures. Compl. ifif 61-70. The
Complaint alleges that this growing discrepancy between revenue
and cash collections was a result of Physiotherapy's switch to the
rate bridge method. Compl. if 72.
According to the Trustee, the Board of Directors was aware
that the Debtor's use of the rate bridge method had led to inflated
revenue. Compl. ifif 59-61. Additionally, the Board was presented
with tangible evidence that Physiotherapy was experiencing
significant cash collection shortfalls. Compl. ifif 61-63. . .. The
Trustee further alleges that various third parties presented the
Board with tangible evidence that Physiotherapy had been
overstating its revenue. Compl. if 74.
Throughout this time, the Debtor had been engaged in an
extensive. marketing process. Court Square, a private equity firm,
emerged as the winning bidder with a cash offer of $510 million.
Def.'s Br. 20. The deal was structured as a reverse-triangular
merger, and Court Square created a subsidiary to merge into
Physiotherapy with Physiotherapy as the surviving entity. The
4
subsidiary financed the transaction by issuing: "(i) a $100 million
term loan (the "Term Loan"), which was part ofa larger credit
facility; (ii) $210 million in Secured Notes underwritten by
Jefferies and RBC (the "Secured Notes"); (iii) a management
equity rollover; and (iv) a minority investment by a third-party."
Def.'s Br. 23. According to the Trustee, these Secured _Notes were
marketed with an OM_ that falsely represented Physiotherapy's pre. tax net income and unadjusted EBITDA. Compl. -~ 82 .. The
.Trustee ·asserts that the·OM overstated·pre~tax net inc01.ne by at·
·least 936% and unadjusted EBITDA by 109% for fiscal year 201'1.
Compl.~~ 83-84. Under the terms of the deal, the new
·Physiotherapy assumed this debt, and Water Street and Wind Point
received $248.6 million in exchange for their shares. Compl. ~ 88.
Allegedly, the Controlling Shareholders profited handsomely from
the fraud while [Physiotherapy] was left insolvent. Compl. ~ 89.
"The sum of all of the foregoing was that Physiotherapy incurred a
massive amount of new debt-predicated on false financials-the
proceeds of which were transferred out to Physiotherapy's former
owners without receiving anything of value in return." Id.
Shortly after the transaction closed, [Physiotherapy's] new
owner retained Deloitte to investigate a gap in accounts receivable
and cash collections from the previous years. Deloitte determined
that the Debtor's net income had been overstated for the years
2010 and 2012.
Physiotherapy, 2016 WL 3611831, at *2-*4.
In December 2012, eight months after the transaction closed, Court Square and the
Defendants entered into an agreement containing a general release of claims ("Release"). The
agreement containing the Release resolved certain "post-closing disputes" relating to the
transaction. (See D.I. 1 at 16) On April 2, 2013, Physiotherapy defaulted on the Senior Notes,
and~
on November 12, 2013 (the "Petition Date"), it filed for relief under chapter 11 of the
Bankniptcy Code. Pursuant to the confirmed Plan, the Trust was created and authorized to
pursue causes of action belonging to the estate. (See B.D.I. 197...:1 at 27-28) Additionally, the
Secured N oteholders assigned their individual claims to the Trustee; as a result, the Trust had
standing to assert claims in the capacity of both an estate representative and an assignee. See
Physiotherapy, 2016 WL 3611831, at *4.
5
On September 1, 2015, the Trustee filed the eight-count complaint which asserted various
claims for actual and constructive fraudulent transfer under the Bankruptcy Code and
Pennsylvania law. Count I of the complaint seeks avoidance and recovery of actual fraudulent
transfers to Defendants, as initial transferees, pursuant to section 548(a)(l)(A) 5 of the
Bankruptcy Code. Count II similarly seeks avo1dance and recovery of constructive fraudulent
transfers to initial transferees pursuant to section 548(a)(l)(B) 6 of the Bankruptcy Code. Count
III seeks avoidance and recovery of transfers to subsequent transferees under the foregoing
sections of the Bankruptcy Code. Count N seeks avoidance and recovery of actual fraudulent
transfers from initial transferees under Pennsylvania's version of the Uniform Fraudulent
Transfer Act, 12 Pa.C.S.A. § 5104(a)(l), and pursuant to section 544(b) 7 of the Bankruptcy
5
Section 548(a)(l) of the Bankruptcy Code grants a trustee the power to avoid any transfer by a
debtor of an interest in property made within two years before the filing of a bankruptcy petition
ifthe transfer was actually or constructively fraudulent. See 11 U.S.C. § 548(a)(l). Pursuant to
section 548(a)(l)(A), transfers or obligations incurred by a debtor may be avoided if made with
actual intent to hinder, delay, or defraud a past or future creditor. The definition of "transfer" is
broad, and includes "the creation of a lien," such. as a security interest, and "each mode, direct or
indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54).
6
Section 548(a)(l)(B) of the Bankruptcy Code allows a trustee to avoid, inter alia, "any transfer
... of an interest of the debtor in property" if the debtor "received less than reasonably
equivalent value in exchange for such transfer" when the debtor was insolvent. See 11 U.S.C.
§ 548(a)(l)(B).
7
Section 544(b) of the Bankruptcy Code authorizes the trustee to "avoid any transfer of interest
of the debtor in property or any obligation incurred by the debtor that is voidable under
applicable law." 11 U.S.C. § 544(b). A trustee proceeding under section 544(b) may avoid a
fraudulent transfer in its entirety without regard to the value of any particular creditor's claim,
and the trustee's recovery is shared by all unsecured creditors, potentially including creditors
who could not themselves avoid the transfer under state law. See In re Cybergenics Corp., 226
F.3d 237, 243 (3d Cir. 2000) ("Once avoidable pursuant to this provision, the transfer is avoided
in its entirety for the benefit of all creditors.").
6
Code. Count V similarly seeks avoidance and recovery of constructive fraudulent transfers to
initial transferees pursuant to section 544(b) of the Bankruptcy Code and 12 Pa~C.S.A.
§§ 5104(a)(2) and 5105. Count VI seeks avoidance and recovery of transfers to subsequent
transferees under Pennsylvania law. Because the Secured Noteholders assigned their individual
claims to the Trustee, Count Vllis asserted by the Trustee as a direct assignee of unsecured
creditors (and not as an estate representative) and asserts direct claims under Pennsylvania law,
12 Pa.C.S.A. § 5104(a)(2), for avoidance and recovery of constructive fraudulent transfers to
initial transferees. Finally, Count VIII seeks avoidance and recovery of transfers made to
subsequent transferees under 12 Pa.C.S.A. §§ 5104(a)(2) and 5105.
In response to the complaint, Defendants moved to dismiss on several grounds, including:
( 1) all of the transfers are immune from avoidance pursuant to the Bankruptcy Code's safe
harbor provision, 11 U.S.C. § 546(e), 8 which prohibits a trustee or estate representative from·
avoiding transactions involving the purchase and sale of securities, and, according to Defendants,
prohibits creditors from pursuing recovery under state fraudulent transfer laws as well; (2) the
. claims against Defendants are barred by the Release; and (3) the Secured Noteholders ratified the
transaction and are thus barred from seeking its avoidance. (See Adv. D.I. 107)
On June 20, 2016, the Bankruptcy Court entered the Interlocutory Order, granting the
Motion to Dismiss in part and denying it in part. See Physiotherapy, 2016 WL 3 611831, at *15.
8
Section 546(e) provides that, notwithstanding section 544, "the trustee may not avoid a transfer
that is a .... settlement payment, as defined by section 101 or 741 [of the Bankruptcy Code],
made by or to a ... financial institution." 11 U.S.C. § 546(e). In response to Defendants'
motion to dismiss, the Trustee argued that payments made to selling. shareholders were not
"settlement payments" in connection with a "securities contract;" because the Defendants' shares
were converted into certificates redeemable for cash prior to the merger's closing, the Trustee
argued that these certificates were not securities. (See Adv. D.I. 134 at 34) The Bankruptcy
Court rejected the Trustee's argument, finding it inconsistent with the broad language of section
546(e) and controlling Third Circuit law on the issue. See Physiotherapy, 2016 WL 3611831, at
*11.
7
The Bankruptcy Court granted the motion to dismiss with respect to Counts II, IV, and V of the
complaint, determining that section 546(e)' s safe harbor prohibited the Trustee's assertion of
constructive transfer claims under section 548(a)(l)(B) and actual and constructive fraudulent
transfer claims brought under section 544(b ). See id. In denying the motion to dismiss with
respect to the fraudulent transfer claims brought directly under state law by the Trustee in the
capacity of a creditor-assignee (Count VII), the Bankruptcy Court undertook a preemption
analysis and rejected Defendants' argument that section 546(e) prohibits avoidance actions by
creditors brought directly under state fraudulent transfer law. See id. at *10-*15. The
Bankruptcy Court determined that neither the text nor the purpose of section 546(e) was
implicated by the constructive fraudulent transfers at issue and declined to find that the safe
harbor preempted state fraudulent transfer laws in this case. Specifically, the Bankruptcy Court
held that "a litigation trustee may assert state law fraudulent transfer claims in the capacity of a
creditor-assignee when: (1) the transaction sought to be avoided poses no threat of 'ripple
effects' in the relevant securities markets; (2) the transferees received payment for non-public
securities, and (3) the transferees were corporate insiders that allegedly acted in bad faith. When
these three factors are present, a finding of implied preemption is inappropriate." Id. at *10. The
Bankruptcy Court also determined that a finding of estoppel by ratification was inappropriate at
this juncture and declined to dismiss the complaint on this basis. See id. at *12. The Bankruptcy
Court further rejected Defendants' contention that the Trust's actual fraudulent transfer claim
under section 548(A)(l )(a) 9 was barred by the Release executed by Physiotherapy before it filed
its Chapter 11 petition and denied the motion to dismiss with respect to Count I. See id. at * 14.
9
Claims for actual fraudulent transfer pursuant to section 548(a)(l)(A) of the Bankruptcy Code
do not fall under the safe harbor provision. See 11 U.S.C. § 546(e) C'[T]he trustee may not avoid
a transfer that is a ... settlement payment ... except under section 548(a)(l)(A) of this title.").
8
Finally, the Bankruptcy Court rejected several other arguments that Defendants do not argue
warrant interlocutory review. See id. at *14-15.
On July 18, 2016, Defendants filed their Motion for Leave to appeal the Interlocutory
Order with respect to three issues. (D .I. 1) On August 1, 2016, Defendants also filed the
Petition (D.I. 4) in this Court, despite the fact that Federal Rule of Bankruptcy Procedure 8006(b)
required Defendants to file the Petition in the court where the matter was then pending, and this
matter was pending in the Bankruptcy Court until August 15, 2016. (See D.I. 14 at 18) At the
time of briefing on these requests, discovery was underway with respect to the Trust's two
remaining claims, with document production scheduled to be completed by January 2017 and
depositions scheduled to be completed in June 2017. (See D.I. 13 at 3; Adv. D.I. 284) A review
of.the adversary docket demonstrates that discovery is scheduled to conclude by May 22, 2018,
with any case dispositive motions to be served no later than June 20, 2018. (See Adv. D.I. 676
(Second Amended Scheduling Order)) 10
3. Applicable Standards. This Court has jurisdiction to hear appeals "with leave of the
court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and
proceedings referred to the bankruptcy judges under section 157 of this title." 28 U.S.C.
10
There have been other recent developments as well. On November 1, 2017, the Bankruptcy
Court entered an opinion and order (Adv. D.I. 624, 625) granting plai~tiffs motion for partial
summary judgment as to potential damages. Defendants have filed a notice of appeal (see Adv.
D.I. 643) along with a motion for leave to appeal the interlocutory order (see Adv. D.I. 644; see
also 17-mc-319-LPS D.I. 1). On November 6, 2017, the Bankruptcy Court entered an
opinion/order (Adv. D.I. 630, 631), denying plaintiffs motion for leave to amend the complaint
to: (1) add additional defendants, and (2) add a prayer for punitive ·damages under the
Pennsylvania Uniform Fraudulent Transfer Act ("PUFTA").
9
§ 158(a)(3). Section 158(a) does not identify the standarq district courts should use in deciding
whether to grant such an interlocutory appeal. See id. "Typically, however, district courts
follow the standards set forth under 28 U.S.C. § 1292(b), which govern interlocutory appeals
from a district court to a court of appeals." In re AE Liquidation, Inc., 451 B.R. 343, 346 (D.
Del. 2011). 11
Under the standards of section 1292(b), an interlocutory appeal is permitted only when
the order at issue (1) involves a controlling question of law upon which thereis (2) substantial
ground for difference of opinion as to its correctness, and (3) if appealed immediately, may
materially advance the ultimate termination of the litigation. See 28 U.S.C. § 1292(b); Katz v.
Carte Blanche Corp., 496 F.2d 747, 754 (3d Cir. 1974). Entertaining review of an interlocutory
order under§ 1292(b) is appropriate only when the party seeking leave to appeal ~'establishes
exceptional circumstances [to] justify a departure from the basic policy of postponing review
until after the entry of final judgment." In re Del. and Hudson Ry. Co., 96 B.R. 469, 472-73 (D.
Del. 1989), aff'd, 884 F.2d 1383 (3d Cir. 1989). In part, this stems from the fact that
"[p]iecemeal litigation is generally disfavored by the Third Circuit." In re SemCrude, L.P., 2010
WL 4537921, at *2 (D. Del. Oct. 26, 2010) (citing In re White Beauty View, Inc., 841F.2d524,
526 (3d Cir. 1988)). Further, leave for interlocutory appeal may be denied for "entirely unrelated
reasons such as the state of the appellate docket or the desire to have a full record before
considering the disputed legal issue." Katz, 496 F.2d at 754.
Pursuant to section 158(d)(2), certification for direct appeal to the circuit court is required
if the Court, "acting on its own motion or the request of a party," determines that:
11
See also Inre Philadelphia Newspapers, LLC, 418 B.R. 548, 556 (E.D. Pa. 2009) ("Based
upon the decision of the Third Circuit in Bertoli v. D'Avella (In re Bertoli), 812 F.2d 136, 139
(3d Cir. 1987), courts within this Circuit confronted with the decision whether to grant leave to
allow an interlocutory appeal are informed by the criteria in 28 U.S.C. § 1292(b)").
10
(i) the judgment, order, or decree involves a question oflaw as to
which there is no controlling decision of the court of appeals for
the circuit or ofthe,Supreme Court of the United States, or
involves a matter of public importance;
(ii) the judgment, order, or decree involves a question of law
requiring resolution of conflicting decisions; or
(iii) an-immediate appeal from the judgment, order, or decree may
materially advance the progress of the case or proceeding in which
· the appeal is taken.
28 U.S.C. § 158(d)(2)(A)(i)-(iii). Thus, the standards for granting direct appeal certification are
essentially the same as those to be applied by the district court in dete~ining whether to grant
leave to appeal under 28 U.S.C. § 1292(b). See In re Advanced Marketing Services Inc., 360
B.R. 429, 434 (Bankr. D. Del. 2007) (observing that legal analyses required in consideration of
motion for leave to appeal interlocutory order and petition for certification of direct appeal are
"virtually identical").
4. Analysis. Defendants assert that their appeal of the Interlocutory Order involves not
one but three controlling questions of law as to which substantial ground for difference of
opinion exists. According to Defendants, these issues are: (i) "whether section 546(e) of the
Bankruptcy Code preempts state fraudulent transfer claims," (ii) "whether a trustee can assert
fraudulent transfer claims on behalf of creditors who have authorized and participated in the very
transfer alleged to be fraudulent," and (iii) whether the Bankruptcy Court erred in its
"determination that an otherwise valid release could later be undone through the expedient of a·
chapter 11 filing, notwithstanding the strong public policy favoring settlements." (D.I. 1 at 1-3)
A.
Controlling Question of Law as to Which
There Is Substantial Ground for Difference of Opinion
"A controlling question of law must encompass at the very least every order which, if
erroneous, would be reversible error on final appeal." Katz, 496 at 755. '" [C]ontrolling' means
serious to the conduct of the litigation, either practically or legally. And on the practical level,
11
saving of time of the district court and of expense to the litigants [has been] deemed ... to be a
highly relevant factor." Id. (internal citation omitted). The "controlling question oflaw" also
must be one as to which there is "substantial ground for difference of opinion." 28 U.S.C. §
1292(b). This calls for more than mere disagreement with the ruling of the bankruptcy court. To
satisfy this standard, "the difference of opinion must arise out of genuine doubt as to the correct
legal standard." Hulmes v. Honda Motor Co., 936 F. Supp. 195, 208 (D.N.J. 1996), aff'd, 141
F.3d 1154 (3d Cir. 1998); see also Patrickv. Dell Fin. Servs., 366 B.R. 378, 386 (M.D. Pa. 2007)
(same). This factor is also met when "the bankruptcy court's decision is contrary to wellestablished law." In re Marvel Entm 't Grp., Inc., 209 B.R. 832, 837 (D. Del. 1997).
i.
Preemption
With the exception of the Tnistee' s actual fraudulent transfer claim under section
548(a)(l )(A) (Count I), which the statute plainly carves out, Defendants argued that the section
546(e) safe harbor barred all of the Trustee's claims for avoidance under sections 544 and
548(a)(l)(B) of the Bankruptcy Code, as well as all of the fraudulent transfer claims asserted
under Pennsylvania law. (See Adv. D.I. 107 at 33-42) Section 546(e) of the Bankruptcy Code
provides, in relevant part:
Notwithstanding sections 544 ... [and] 548(a)(l)(B) ... of this
title, the trustee may not avoid a transfer that is a . . . settlement
payment, as definedin section 101 or 741 of this title, made by or
to (or for the benefit of) a commodity broker, forward contract
merchant, stockbroker, financial institution, financial participant,
or securities clearing agency, or that is a transfer made by or to (or
for the benefit of) a ... financial institution, [or] financial
participant ... in connection with a securities contract, as defined
in section 741(7) ... except under section 548(a)(l)(A) of this title.
Defendants argued that the safe harbor reflects Congress's clear intention to preempt state
fraudulent transfer law. According to Defendants, if an otherwise barred transfer could be
recovered under state law, thereby implicating the same concerns regarding the unraveling of
12
settled securities transadions that section 546(e) seeks to address, the exemption set forth in
section 546(e) would be rendered useless. (See Adv. D.I. 107) Defendants relied primarily on
the Second Circuit's decision inln re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98,
124 (2d Cir. 2016), which resolved a divide within New York federal courts over this issue, and
determined that section 546(e) preempts state fraudulent transfer law. 12 In reaching this
conclusion, the Second Circuit observed that "[o]nee a party enters bankruptcy, the 'Bankruptcy
Code constitutes a wholesale preemption of state laws regarding creditors' rights." Id. at 111.
The Second Circuit also concluded that the larger purpose behind the safe harbor was "to
promote finality for individual investors by limiting the circumstances, e.g., to cases of
intentional fraud, under which securities transactions could be unwound." Id. at 120 (internal
citations and quotation marks omitted).
Conversely, the Trustee argued that section 546( e), by its express terms, only bars
avoidance actions brought by a "trustee," and the Bankruptcy Code defines "trustee" as the
statutory "representative of the estate." 13 Because the statute is silent as to creditors, the Trustee
argues that a litigation trust may assert claims directly under state fraudulent transfer law so long
12
Defendants' motion to dismiss relied on Whyte v. Barclays Bank, PLC, 494 B.R. 196
(S.D.N.Y. 2013), and the parties submitted supplemental briefing following the Second Circuit's
decision in Tribune. In Barclays, the plan established a litigation trust to prosecute actions. See
494 B.R. at 198. The debtors and certain creditors assigned claims to the trust, including
avoidance actions arising under the Bankruptcy Code and state law. See id. Relying on the
policy underlying the section 546(g) safe harbor- another limitation on a trustee's avoidance
power that protects·transfers made to "swap participant[s]" or financial participant[s]" - the court
held that section 546(g) preempted state fraudulent claims brought by a litigation trustee as an
assignee. The Barclays court concluded that permitting a litigation trustee to assert such claims
would create a substantial obstacle to Congress's objective of ensuring stability in the
derivatives, commodities, and swap markets. See id. at 200-01.
13
See 11 U.S.C. § 323(a) (defining role and capacity of trustee in case under Bankruptcy Code);
see also Grede v. Bank ofNew York Mellon, 598 F.3d 899, 902 (7th Cir. 2010) (distinguishing
between "trustee in bankrllptcy" and "post-bankruptcy vehicle").
13
as such claims were assigned to the litigation trust by the creditors. (See Adv. D.I. 135 at 34-35)
In support of this argument, the Trustee cited the PHP case, in which this Court concluded that:
ifthe avoidance action were brought by a trustee or debtor-in- ·
possession (or the successor to a debtor-in-possession), the
avoidance action would be barred by Section 546(e) of the
Bankruptcy Code. However, in this case, PHP LLC has not
asserted its claims against Movants in the capacity of a trustee or
as a successor-in-interest to a trustee or debtor-in-possession.
Rather, PHP LLC is bringing the instant claims as a direct
assignee of the unsecured creditors. As such, Section 546(e) is
not a bar to PHP LLC's claims.
In re PHP Liquidating, LLC v. Robbins, 291 B.R. 603, 607 (D. Del. 2003) (emphasis added),
aff'd sub nom. In re PHP Healthcare Corp., 128 Fed. App'x 839 (3d Cir. 2005).
The Bankruptcy Court undertook a preemption analysis and determined that while
section 546(e) bars fraudulent transfer claims under§§ 548(a)(l)(b) and 544 of the Bankruptcy
Code (i.e., barring the Trust from asserting creditor claims in its capacity as an estate
representative), it does not preempt state law fraudulent transfer claims brought by the Trust in
its capacity as an assignee of creditors, if: (1) the transaction sought to be avoided poses no threat
of "ripple effects" in the relevant securities markets; (2) the transferees received payment for
nonpublic securities; and (3) the transferees were corporate insiders that allegedly acted in bad
faith. See Physiotherapy, 2016 WL 3611831, at *10.
Defendants argue that a reversal of the Bankruptcy Court's preemption decision would
result in the dismissal of the Trust's sole remaining constructive fraudulent transfer claim (Count
VII) and, thus, presents a controlling question oflaw. (See D.I. 1 at 8) Defendants characterize
the Bankruptcy Court's ruling as.a sweeping "holding that Section 546(e) does not preempt state
:fraudulent transfer claims." (D.I. 1 at 1) But Defendants' characterization ignores the fact that
the Bankruptcy Court's preemption ruling turned on facts specific to this case, including the
nature of the transfers at issue and the basis for the Trust's claims. The Bankruptcy Court
14
determined that the transfers at issue did not involve publicly-traded securities, which eliminated
the risk that avoidance would cause "any sort of ripple effect to the broader secondary market."
Physiotherapy, 2016 WL 3611831, at *9. The Bankruptcy Court also note4 that allegations that
corporate insiders had acted in bad faith implicated additional policy concerns relevant to the
preemption analysis, including "Congress' policy of providing remedies for creditors who have
been defrauded by corporate insiders." Id. The Trustee argues that the requested interlocutory
appeal does not present a controlling question oflaw because any implied preemption analysis is
necessarily case-specific and applies only "when, 'under the circumstances of [a] particular case,
[the state law] stands as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress." (See D.I 13 at 19 (quoting De Weese v. Nat'! R.R. Passenger Corp.
(Amtrak), 590 F.3d 239, 246 (3d Cir. 2009); Hines v. Davidowitz, 312 U.S. 52, 67 (1941))
The Court agrees with the Trustee that the Bankruptcy Court's preemption analysis was
specific to the facts of this case. The Court is not persuaded that Defendants have established a .
controlling question of law that justifies deviation from the fundamental judicial policy of
deferring review until after the entry of a final judgment.
Nor is the Court convinced that a substantial ground for difference of opinion exists, as
the Bankruptcy Court's preemption analysis followed well-established Third Circuit and
Supreme Court law. In determining whether Congress ,occupied the field for exclusive federal
regulation, the Bankruptcy Court began with Third Circuit's statement that the "'strong
presumption against inferring Congressional preemption' also applies 'in the bankruptcy context'
which may be overcome when 'a Congressional purpose to preempt ... is clear and manifest.'"
Rosenberg v. DVI Receivables XVIL LLC, 835 F.3d 414, 419 (3d Cir. 2016) (quoting In re Fed.Mogul Glob. Inc., 684 F.3d 355, 365 (3d Cir. 2012)); see also BFP v. Resolution Trust Corp.,
511 U.S. 531, 540, 544-45 (1994) ("[T]he Bankruptcy Code will be construed to adopt, rather
15
than to displace, preexisting state law."). "To. discern the preemptive intent of Congress," the
Bankruptcy Court proceeded to follow Supreme Court guidance and "look[ ed] to the text,
structure, and purpose of the [safe harbor] statute and the surrounding statutory framework."
Rosenberg, 835 F.3d at 419 (citing Medtronic, Inc. v. Lohr, 518 U.S. 470, 486 (1996)).
The Bankruptcy Court found the plain language of the statute setting out the safe harbor
cut against preemption. For example, section 546 is titled "limitations on avoidance power," and
by its express terms, Congress limited the safe harbor to certain avoidance actions brought by a
bankruptcy trustee under sections "544, 545, 547, 548(a)(l)(B), and 548(b)." 11 U.S.C.
§ 546(e) ("the trustee may not avoid ..." certain transfers) (emphasis added). The safe harbor is
silent with regard to a creditor's ability to bring such claims arising under state law rather than
the Bankruptcy Code. See Physiotherapy, 2016 WL 3611831, at *9.
Looking to the structure of the safe harbor, the Bankruptcy Court noted that, in other
sections of the Bankruptcy Code, Congress has explicitly stated when it intends for a provision to
apply to entities other than the trustee (see, e.g., 11 U.S.C. § 1109(b)); moreover, other
Bankruptcy Code provis,ions expressly preempted state law by incorporating phrases like
"notwithstanding any nonbankruptcy law" (see e.g., 11 U.S.C. § 54l(c)(l)). See Physiotherapy,
2016 WL 3611831, at *9.
Finally, looking to the purpose and legislative history of the safe harbor provision, the
Bankruptcy Court noted that the safe harbors were originally enacted to protect commodities
clearing agencies from massive liability, based on the theory that avoidance of margin payments
could present significant systemic risk in the derivatives market, causing a "ripple effect" as the
failure of a clearinghouse could adversely impact all market participants. See id. at *7. The
Bankruptcy Court concluded that Tribune and similar cases placed too much emphasis on policy
concerns which find minimal support in the Congressional record (e.g., finality for individual
16
investors), whereas the legislative history suggests "sections 546(e) and 546(g) were enacted to
· further augment the protections against systemic risk codified in the initial safe harbors.'' Id. at
*8. Adopting the reasoning set forth in Lyondell that was later rejected in Tribune, the
Bankruptcy Court found "[n]othing in the legislative history of the existing law evidences a
desire to protect individual investors who are beneficial recipients of insolvents' assets. The
repeatedly expressed concern, by contrast, has been that of protecting market intermediaries and
protecting the markets - in each case to avoid problems of 'ripple effects,' i.e., falling dominos."
Physiotherapy, 2016 WL 3611831, at *8 (quoting In re Lyondell Chemical Co., 503 B.R. 348,
373 (S.D.N.Y. 2014)). Ultimately, the Bankruptcy Court concluded that the legislative history
did not support an interpretation of the safe harbor as a broad preemption of all state law
avoidance claims, and that preemption was not appropriate in this case. See id.
.The Bankruptcy Court's reading of the safe harbor is supported by the plain language of
the statute, and its careful preemption analysis followed controlling Third Circuit and Supreme
Court precedent; which construes the Bankruptcy Code as adopting, rather than displacing,
preexisting state law, absent a clear and manifest indication from Congress. See id. at *7-*10.
Defendants argue there is genuine doubt as to the correct standard here based on the conflicting
decision in Tribune. However, as noted by the Bankruptcy Court, the Tribune case involved
publicly-traded securities, an important factual distinction that implicated the risk of "ripple
effects" that Congress sought to avoid. See Physiotherapy, 2016 WL 3611831, at *9 .14 Because
the transfers here were to corporate insiders, systemic risk concerns were not at issue.
Defendants' mere disagreement with the outcome of the Bankruptcy Court's case-specific
14
Similarly, in Barclays, the Trustee sought to avoid a large portfolio of swap transactions. See
494 B.R. at 198 (seeking avoidance of portfolio of transactions as fraudulent conveyance under
New York debtor-creditor law).
17
preemption analysis is not a substantial ground for difference of opinion that justifies
interlocutory appeal.
ii.
Ratification
Defendants argued to the Bankruptcy Court that "[b]ecause the Noteholders knowingly
authorized and participated in the transfer ... th~y are estopped from seeking its avoidance."
(Adv. D.I. 107 at 54) Specifically, Defendants argued that the noteholders ratified the fraudulent
transfers when they purchased their securities becau~e they were aware that the proceeds from
the issuance would be used to cash out the Selling Shareholders. Thus, according to the Trustee,
the noteholders are estopped from seeking to avoid the transfer they approved. Defendants
encouraged the Bankruptcy Court to adopt the view expressed in Lyondell that creditors "who
authorized or sanctioned the transaction, .or, indeed participated in it themselves, can hardly
Claim to have been defrauded by it, or otherwise victims of it." Lyondell, 503 B.R. at 383-84.
The Lyondell Court concluded that a creditor's knowledge that it was lending "for the purpose of
financing an LBO, and that the LBO proceeds would go to the stockholders," was sufficient to
establish a ratification defense. Id. at 385.
Conversely, the Trustee argued that the noteholders could not have knowingly authorized
and participated in the transaction because they purchased the notes based on fraudulent financial
statements, and the proper question is whether these creditors "had full knowledge of all material
facts" surrounding the transaction. (Adv. D.I. 135 at 47) (internal quotation marks omitted) In
response, Defendants denied advancing a ratification defense "in the strict sense of the word" contending that such a defense would apply only to claims for fraud as·opposed to claims for
fraudulent transfer. Defendants argued that while courts have described the estoppel defense
using different terms - including "ratification," "estoppel," or "material participation in the
transaction" -the underlying theory, according to Defendants, remains the same: "a creditor who
18
participates in (or consents to or ratifies) a fraudulent transfer cannot later argue that the transfer
should be avoided." (Adv. D.I. 163 at 4) "The real and indisputable point is that the
N oteholders provided financing knowing the funds would be used to pay [Defendants] for their
shares of [the Debtor]." (Id.) Because they participated in the transaction, "[t]he Noteholders
(and the Litigation Trust as their representative) are thus estopped from challenging the very
transfer to which they knowingly consented." (Id.)
In evaluating the defense, the Bankruptcy Court noted that ratification "is the act of
knowingly giving sanction or affirmance to an act which would otherwise be unauthorized or not
binding." Physiotherapy, 2016 WL 3611831, at *12 (citing 57 N.Y. Jur. 2d Estoppel,
Ratification and Waiver§ 87 (2007)). The Bankruptcy Court relied on Tronox and Adelphia, in
·which courts appear to have endorsed the "material facts" test articulated in ASARC0. 15 Noting
that use of proceeds is simply one piece of the entire "fraud alleged in the complaint," the
Bankruptcy Court concluded that there is a material dispute as to whether the Secured
Noteholders had knowledge of the material facts of the transaction. Physiotherapy, 2016 WL
3611831, at *12. As the ratification defense hinged on factual issues which remained subject to
further development in discovery, "a finding of ratification would be inappropriate at this
juncture," and the Bankruptcy Court declined to dismiss the fraudulent transfer action based on
this defense. Id.
15
In In re Tronox, 503 B.R. 239, 276 (Bankr. S.D.N.Y. 2013), the court determined that because
defendants "did not establish that the bondholders knowingly gave sanction to the fraudulent
conveyances complained of in this case," a finding of ratification was inappropriate. In Adelphia
Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust), 634 F.3d 678, 693-94 (2d
Cir. 2011), the Second Circuit noted: "[w]here the allegedly ratifying party's silent acquiescence
to a transaction credibly appears to have resulted from the complexity of the situation rather than
intent, ratification does not occur-."
19
On appeal, Defendants assert that the Bankruptcy Court incorrectly characterized their
defense as "ratification," when it should have applied the "estoppel" standard. According to
Defendants, the vast majority of courts have not required "full knowledge of the facts
surrounding the transaction" when considering the estoppel defense; rather, application of the
defense requires only "knowledge of the transfer itself." (D.1. 1 at 15-16) Conversely, the
Trustee argues it is Defendants who have conflated the issues: "the question here is what the
elements of their defenses are, not what the elements of the Trust's claims are," and it is firmly
established in common law "that the defenses of ratification and estoppel apply only when a
party acts knowingly." (D.I. 13 at 11) The Trustee contends that Defendants' pleadings and
case law demonstrate that concepts of ratification and estoppel are related, and "'no estoppel
arises from the mere fact that the creditor has knowledge of the proposed transfer."' (D.I. 13 at
10) (quoting 16A Cal. Jur. 3d § 410))
Defendants have not established that the Bankruptcy Court's ratification ruling involves a
controlling question of law. Defendants contend that reversal on the ratification issue would
result in dismissal of the entire case, sparing both the parties and the Court the expense and
burden oflitigating the action. (See D.I. 1 at 14) However,
t~e
Court agrees with the Trustee
that Bankruptcy Court's ruling was not a final ruling on any defense- regardless of whether the
applicable defense is characterized as ratification or estoppel - but, rather, a non-final
d~termination
that application of the defense was "inappropriate at this juncture." (D.I. 13 at 12-
13) The Bankruptcy Court merely determined that facts regarding the creditors' knowledge and
intent were relevant and must be developed before deciding whether a defense applies. See
Physiotherapy, 2016 WL 3611831, at *12.
Nor have Defendants established substantial grounds for difference of opinion.
Defendants argue that whether the doctrine of estoppel requires "knowledge of all material facts"
20
"appears to be a matter of first impression not only in this District but within this Circuit." (D .I.
1 at 14) (citing Klapper v. Commonwealth Realty Trust, 662 F. Supp. 235, 236 (D. Del. 1987)
(finding that "substantial ground for difference of opinion" existed where issue presented "case
of first impression")) However, again, all the Bankruptcy Court decided was that further factual
development is required before applying the defense of ratification or estoppel. Moreover, it
appears that the Bankruptcy Court applied well-settled tenets oflaw. (See D.I. 13 at 9-11)
iii.
Prepetition Release
Defendants argue that all of the Trustee's claims, including the actual fraudulent transfer
claim under section 548(a)(l)(A), were barred by the Release that Physiotherapy executed prior
to the Chapter 11 proceedings. (See Adv. D.I. 107 at 43-49) The Release bars any "claims for
losses, damages, indemnification, or other payment" against any party "for any breach, violation
or inaccuracy of any of the terms, conditions, covenants, agreements or representations and/or
warranties in the Merger Agreement." (Adv. D .I. 108 at Ex. 8) Additionally the parties
"irrevocably waive[d] all such claims, whether in law, equity, tort or otherwise, whether or not
known now, heretofore or hereafter, whether anticipated or unanticipated, suspected,
unsuspected or claimed, fixed or contingent." (Id.)
In moving to dismiss, Defendants argued that the Release barred the Debto~ from
asserting any fraud or fraud-based claims, and bars the Trust as well, because the Trust is
standing "in the shoes'; of the Debtor. (See id. at 43) The Bankruptcy Court disagreed, noting
that post-petition avoidance actions can only be brought by the trustee after the petition is filed;
and just as the prepetition debtor does not own the right to pursue a fraudulent transfer claim, it
follows that the prepetition debtor may not waive such claims either. See Physiotherapy, 2016
WL 3611831, at *14 (citing Official Comm. of Unsecured Creditors v. UMB Bank (In re
Residential Capital, LLC), 497 B.R. 403, 424 (Banla. S.D.N.Y. 2013)).
21
In concluding that the Trustee was not bound by the Release, the Bankruptcy Court relied
on several Third Circuit cases. For instance, in Lafferty, the Third Circuit noted that actions that
may be pursued by bankruptcy trustees generally fall into two categories: "(1) those brought by
the trustee as successor to the debtor's interest included in the estate under Section 541, and
(2) those brought under one or more of the trustee's avoiding powers." Official Comm. of
Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 356 (3d Cir. 2001). Pursuant to
section 541 of the Bankruptcy Code, the bankruptcy estate is comprised of "all legal or equitable
interests of the debtor in property as of the commencement of the case," including "whatever
causes of action the debtor may have possessed prior to the petition date." 11 U.S.C._ § 541. Any
action included in the estate under section 541 that is later pursued by a bankruptcy trustee is
brought by the trustee as successor to the debtor's interest in that claim and is a "debtor cause of
action." In re IH 1~ Inc., et al., 2016 WL 6394296, *13 (Bankr. D. Del. Sept. 28, 2016). The
Third Circuit has noted that "the trustee stands in the shoes of the debtor" when bringing such
actions, and is therefore "subject to the same defenses as could have been asserted by the
defendant had the action been instituted by the Debtor." Lafferty, 267 F.3d at 356.
Claims that the Bankruptcy Code authorizes a trustee to assert on behalf of creditors,
which are largely avoidance actions brought pursuant to sections 544, 54 7, and 548 of the
Bankruptcy Code, are "creditor actions." The power to pursue such claims, as exercised by an
estate representative, "relate[s] to the trustee's power to resist pre-bankruptcy transfers of
property." Id. The Third Circuit has held that for purposes of section 548 avoidance actions, the
trustee does not stand in the shoes of the debtor, as such claims are not "derivative of the
bankrupt." Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir.
1989) (holding claims under § 548 are "creditor Claims" and "there is no justification for binding
creditors to [an agreement's arbitration provision] with respect to claims that are not derivative
22
from the party to it"); see also McNamara v. PFS (In re Personal & Bus. Ins. Agency), 334 F.3d
239, 245 (3d Cir. 2003) ("The Lafferty Court made clear that its holding did not extend to actions
brought under Code· sections other than [section] 541 ").
Relying on these Third Circuit cases and other authorities, the Bankruptcy Court
concluded that the Debtor had no ability to waive section 548 claims, and the Trustee was not
bound by the Release. See Physiotherapy, 2016 WL 3611831, at *14. On appeal, Defendants
assert the Bankruptcy Court erred in holding that "because a prepetition debtor does not own the
right to pursue afraudulent transfer claim in bankruptcy, the Release did not bar claims by the
Trust brought post-petition on behalf of the Debtor." (D.I. 1 at 17)
Defendants assert that this issue presents a controlling question of law because reversal
on the effect of the Release would result in dismissal of the Trustee's claim under section
548(a)(l)(A) for actual :fraudulent transfer. (See id.) The .Trustee disagrees, contending that
because the Bankruptcy Court held that the Release did not bind the Trustee, the Bankruptcy
Court did not have to decide whether the terms of the Release encompass the actual :fraudulent
transfer-claim. (See D.I. 13 at 8-9) The Trustee argues that the Release only applies to claims
for "breach, violation or inaccuracy of any terms, conditions, covenants, agreements or
representations and/or warranties in the Merger Agreement," 16 and the Trust's claim is
predicated on other documents, including the OM. (D.I. 13 at 9 (emphasis added); Compl. at~
82) Thus, the Release would not bar the actual fraudulent conveyance claim even if the Trustee
was bound by such a prepetition waiver.
16
Adv. D.~. 108-8 at 2 (emphasis added).
23
The Court agrees with the Trustee. Because the scope of the Release may present a
disputed issue of fact, and is subject to further development through discovery, interlocutory
review is not appropriate. Defendants have not identified a controlling question of law.
Nor have Defendants identified an issue on which there exists substantial grounds for .
disagreement. Defendants contend "precedent bearing on this matter is thin" (D.I. 1 at 19) and
the Bankruptcy Court ignored observations made recently in JLL Consultants, Inc. v. Hormel
Foods Corp. (Iri re AgFeed USA LLC), 2015WL 9133627 (Banla. D. Del. Dec. 15, 2015). In
AgFeed, the debtors had entered irito a prepetition settlement agreement with a defendant,
including a release and a requirement that the debtor issue a promissory note to the defendant.
See id. at *2. Following the bankruptcy filing, the trustee initiated an action alleging that the
issuance of the promissory note was a fraudulent transfer. See id. The court determined that the
release "contemplates and provides for the situation that arose here, i.e., a claim for fraudulent
transfer," and the action was precluded by the release. Id. at *5. However, as the Bankruptcy
Court determined,. the decision in AgFeed was based on the specific facts of that case. The
applicability, if at all, of that decision to the different facts here does not create substantial
grounds for difference of opinion warranting interlocutory review. Additionally, the.issue of
whether a pre-petition release of claims like those involved here may be binding on a trustee was
not briefed in AgFeed, nor did the defendant raise the argument. See AgFeed, 2015 WL
9133627, at *4-*5. Finally, it is well-settled that "prior to bankruptcy, a debtor may not waive
ballkruptcy rights that inure to the benefit of unsecured creditors not a party to that waiver."
Minn. Corn Processors, Inc. v. Am. Sweeteners, Inc. (In re Sweeteners, Inc.), 248 B.R. 271, 276
(Banla. E.D. Pa. 2000)).
24
B.
Whether Immediate Appeal Will Materially Advance Termination of Litigation
Defendants argue that if they are successful on appeal of these issues, the entire case will
be resolved. (See D.I. 1 at 20) They add that, absent interlocutory appeal, the parties may be
forced to litigate issues and incur costs that might tum out to have been entirely unnecessary.
(See id.) The Trustee counters that Defendants would have to prevail on both the prepetition
release issue, which targets the Trustee's actual fraudulent transfer claim, and either the section
546(e) or ratification issues, which target the constructive fraudulent transfer claim, in order for
there to be any chance of material advancement of termination of the litigation. (See D.I. 13 at
4) The Trustee also points to disputed issues of fact underlying the issues Defendants seek to
appeal, observing that subsequent developments in the Bankruptcy Court may moot certain
disputes, a further indication that immediate appeal would not materially advance the litigation.
(See id. at 5)
Immediate appeal is no_t likely to advance the termination of this litigation. Defendants
must succeed on more than one of their issues to terminate the litigation. Under the
circumstances, an immediate appeal of one or all of these issues "would only promote piecemeal
determination of the questions raised in the adversary action and would likely create unnecessary
delay." AE Liquidation, 451 B.R. at 348.
C.
Whether Exceptional Circumstances Justify Immediate Appeal
Because an interlocutory appeal represents a deviation from the basic judicial policy of
deferring review until after the entry of final judgment, the party seeking leave to appeal an
interlocutory order must also demonstrate that exceptional circumstances exist. See In re
Advanced Marketing Services, Inc., 2008 WL 5680878 (D. Del. April 3, 2008). "Interlocutory
appeal is meant to be used sparingly and only in exceptional cases where the interests cutting in
25
favor of immediate appeal overcome the presumption against piecemeal litigation." AE
Liquidation, 45 l B.R. at 349 (internal quotation marks omitted).
Defendants' opening brief did not identify any exceptional circumstances that might
warrant deviation from the final judgment rule. (See D.I. 1) In their reply brief, Defendants
argue that exceptional circumstances are present based on the "conflict with Barclays and
Tribune and potential for a circuit split on an important issue of bankruptcy jurisprudence
involving the scope of [s]ection 546(e)," together with "the lack of any controlling Third Circuit
precedent on the estoppel and release issues." (D .I. 18 at 17)
The Court is not persuaded that exceptional circumstances are presented here.
Defendants have failed to point to "any circumstance or reason that distinguishes the case from
the procedural norm and establishes the need for immediate review." Jn re Magic Rests., Inc.,
202 B.R. 24, 26-27 (D. Del. 1996).
5. Conclusion. For the reasons explained above, the Court will deny Defendants'
Motion for Leave to appeal the Interlocutory Order. Accordingly, the Petition is also denied.
HON. LEO ARD P. STARK
UNITED STATES DISTRICT JUDGE
December 21, 2017
Wilmington, Delaware
26
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?