Bankruptcy Preference Creditor's Digest

Barclays Capital Inc. Opposition to Pirinate Consulting Group’s Motion to Amend it Avoidance Complaint

09/23/2011 – Defendants Brief in Opposition to Plaintiffs Motion for Leave to Amend Complaint filed in the Spansion, Inc. Adversary Proceedings by Barclays Capital Inc. before Chief, U.S. Bankruptcy Judge Kevin J. Carey in the District of Delaware filed by Richards, Layton & Finger, P.A. (Wilmington, Delaware) attorneys Robert J. Steam, Jr., Julie A. Finocchiaro, and Amanda R. Steele .

Defendant Barclays Capital Inc. (“Barclays” or “Defendant”) opposes the motion of the Pirinate Consulting Group, LLC (“Plaintiff’), Claims Agent for the Chapter 11 Estates of Spansion, Inc., et al. (the “Debtors”) to amend its avoidance complaint.  Barclay’s opposition is based on dual grounds – first, the amended complaint so drastically alters the original pleading that can not relate back; and second, the proposed amend complaint itself would be would be subject to Rule 12(b)(6) dismissal.  Barclays weaves together multiple limitations on avoidance actions, some common and some obscure, into a formidable effort to dismiss the Plaintiff’s avoidance complaint in its entirety.  Registered users click here to see a copy of this brief.

Background – The Motion to Dismiss

Barclays initially confronted a classic, “virtual” 5 count avoidance complaint resting on a single factual allegation – Defendant received a $1.5 million payment from Debtor Spansion LLC during the preference period.  Plaintiff alleged that this single transfer constituted a preferential transfer under Section 547, a constructive fraudulent conveyance under Section 548(a)(1)(B), and a post petition transfer under Section 549.  Plaintiff sought as its remedies recovery of the avoided transfer under Section 550 and disallowance or reconsideration of Defendant’s pre-petition claims  (of which there were none) under Section 502(d).

On April 29, 2011, Barclays filed a Motion to Dismiss the Section 502, 548 and 549 counts on grounds that those counts of the Complaint simply parroted the language of the statutes at issue and alleged no facts in support of the purported claims.  Barclays did not seek dismissal of the Section 547 preferential transfer count.

Plaintiff’s assessment of its case in responding to Barclays’ motion to dismiss apparently revealed some problems – the $1.5 million payment by Spansion LLC was a retainer paid pursuant to an engagement letter between Barclays and the co-debtor, parent holding company  Spansion, Inc.  This simply meant that the $1.5 million payment, or whatever portion was avoidable, was far more likely avoidable as a fraudulent conveyance than as a preferential transfer.  The Section 548 count, normally a placeholder claim in the “virtual” 5 count complaint, now became the primary cause of action.

Plaintiff’s Decision to Pursue the Fraudulent Conveyance Claim

On August 12, 2011, Plaintiff filed both an opposition to the motion to dismiss and a motion to amend the original complaint.  Plaintiff’s response to the motion to dismiss was largely an unceremonious concession that its claims under 549 and 502(d) were without merit and its Section 548 fraudulent conveyance claim was inadequately pled.  However,   Plaintiff opposed dismissal of its claim under Section 548 on the grounds that the concurrently filed proposed amendment solved the deficiencies in pleading.  Indeed, the proposed amended complaint added 17 paragraphs of factual allegations supporting a fraudulent conveyance count on two theories:

1.  Spansion LLC had paid a debt of its parent holding company, Spansion Inc. – i.e. a classic “wrong payor” constructive fraudulent transfer claim.  The transferor debtor Spansion LLC had received no reasonably equivalent value for the payment made in satisfaction of the debt of  its parent, Spansion Inc.

2.  Barclays had worked only 46 days between the execution of the engagement letter until the bankruptcy filing.  The “retainer” was to cover a 6 month period.  Defendant provided on a pro-rata, per diem basis, at most only $377,049 worth of services during the 46 days they worked.  “There remains, at least $1,122,950 of the $1,500,000 transfere for which no services had been provided.”

The amended complaint also added a Section 542 count for turnover of property of the Debtors – i.e. the “unearned” portion of the retainer.

Summary of Barclays’ Arguments in Opposition

In its opposition to the Plaintiff’s motion to amend the complaint, Barclays seeks denial of the motion to amend and dismissal of the Section 547 preferential transfer count (left alone in the Defendant’s motion to dismiss).  Barclays summarizes its arguments as follows:

Section 548. Leave to amend to assert a fraudulent transfer claim should be denied for either (or both) of the following reasons:

a. The statute of limitations expired and Plaintiff’s proposed amended fraudulent transfer claim does not relate back under Rule 15(c). Plaintiff has altered the fraudulent transfer claim so radically that it cannot demonstrate that Defendant received fair notice of the conduct, transaction or occurrence that Plaintiff now seeks to challenge.

b. The amended fraudulent transfer claim fails to state a claim and accordingly the amendment should be denied as futile under Rule 15(a). Plaintiff’s allegation that Spansion LLC received only nominal value is wrong as a matter of law, because Plaintiff has alleged that “the Debtors operated as a single, consolidated enterprise” and/or because the Debtors’ estates were substantively consolidated. Plaintiffs allegation that Spansion Inc. did not receive reasonably equivalent value also fails as a matter of law because it is premised on an implausible reading of the agreement at issue. The Amended Complaint also fails to adequately allege insolvency because (i) it does not plead a single fact in support of Spansion LLC’s insolvency and (ii) it does not allege that Spansion Inc.’s liabilities exceeded its assets on a fair value basis.

Section 542. Leave to amend to assert a turnover claim should be denied on grounds of futility because the Amended Complaint fails to state a claim. A turnover claim only may be asserted where the transfer at issue already has been avoided or the defendant does not dispute the debtor’s ownership of the property in question. Here, the transfer has not been avoided and Defendant disputes the Debtors’ claim to ownership.

Section 547. Based on the new pleaded facts, Plaintiff’s preference claim fails as a matter of law. The Amended Complaint alleges that one debtor paid an antecedent debt owed by another debtor. Section 547 requires that the payor and the obligor be the same entity.

The Underlying Arguments of Broader Application

Underlying the arguments summarized above, Baclays provides substantial argument and authority addressing the following matters of broad application in avoidance action defense:

• Indirect benefit to a subsidiary of services provided to the parent corporation constitutes reasonably equivalent value to the subsidiary where there is an “identity of interests” of parent and subsidiary.
• Substantive consolidation precludes “wrong payor” constructive fraudulent transfer claims as between the consolidated debtors.
• The minimum allegations required for pleading debtor insolvency at the time of a purported fraudulent transfer.
• The failure of factual allegations as to insolvency of a parent corporation to be the basis for inferring the insolvency of a subsidiary.

Finally,  in the following portion of its brief,  Barclays provides a comprehensive analysis of retainer classifications and the application of the criteria for such classification to professional services engagement letters.

b. Plaintiffs assertion that Spansion Inc. did not receive reasonably equivalent value is not plausible.

Plaintiff alleges that Spansion Inc. did not receive reasonably equivalent value in exchange for the Payment because Defendant supposedly was to provide financial advisory services for six months, but only provided services for 46 days. See Am. Compl. ¶¶ 34, 35. Plaintiff further argues (but does not specifically allege) that Defendant was to be paid on a per diem basis. See Motion to Amend at 10 (“Defendant provided on a pro-rata per diem basis, at most, only $377,049.17 worth of financial advisory services during the forty-six day time period for which it was engaged to provide said services. There remains, at least, $1,122,950.83 of the $1,500,000.00 Transfer for which no services have been provided.”). Plaintiff’s “interpretation” of the Engagement Agreement finds no support in the agreement and is not plausible.

*     *    *

The Engagement Agreement is governed by New York law. See Engagement Agreement ¶17. Under New York law, a clear and unambiguous agreement is enforced according to its terms. See generally Six Flags, Inc. v. Parc Management, LLC (In re Premier Int’l Holdings,  Inc.), 443 B.R. 320, 333-36 (Bankr. D. Del. 2010) (discussing New York contract law). Nowhere does the Engagement Agreement provide that Defendant was to be compensated on a per diem basis or had any obligation to refund any portion of the $1.5 million retainer. Plaintiff simply invented these obligations. Indeed, on its face, the Engagement Agreement is a general retainer agreement, and the $1.5 million retainer was earned upon receipt.

Courts recognize two general categories of retainers: general (or “classic”) and specific (or “special”). The Third Circuit has observed that (1) “[a] retainer is general ‘where the services being purchased are the [professional's] “availability” to render a service if and as needed in a specific time frame’ and thus [a general retainer] is ‘earned when paid’, and (2) “a retainer is special or specific ‘where the funds paid are for a specific service’ and “[i]n that circumstance, the retainer remains the client’s property if the contemplated services are not provided.” Ryan v. Butera, Beausang, Cohen & Brennan, 193 F.3d 210, 216 (3d Cir. 1999); see also In re ACandS, Inc., 297 B.R. 395, 401 (Bankr. D. Del. 2003) (advance payment or security retainer entitles debtor to unearned portion of retainer); In re Stone Creek Mechanical, Inc., 2004 WL 5855600, at *8 (Bankr. E.D. Pa. Sept. 30, 2004) (“an essential characteristic of the classic retainer is that it is entirely earned by the [professional] upon payment, with the [client] retaining no interest in the funds”); Levisohn, Lerner, Berger & Langsam v. Medical Taping Sys., Inc., 20 F. Supp. 2d 645, 650-51 (S.D.N.Y. 1998) (recognizing same categories of retainers under New York law).

In evaluating the nature of a retainer agreement, courts have considered factors such as (1) whether the agreement requires availability of the professional for indeterminate work, (2) whether the agreement provides a separate mechanism {from the retainer) to pay for services rendered, and (3) whether the retainer is refundable if services are not rendered. See, e.g., Ryan, 193 F.3d at 215-17 (finding “as a matter of law” that agreement was general retainer rather than special retainer where contract required professional to be available to handle indeterminate amount of work, contract contained separate clauses for retainer and payment of specific legal services, and retainer was described as non-refundable); In re Gray’s Run Tech., Inc., 217 B.R. 48, 52-55 {Barth. M.D. Pa. 1997) {agreement was special retainer where it contained no reference to securing professional’s availability, did not provide for consideration separate from hourly rate, and specifically was described as advance fee in payment of contemplated services). On the face of the Engagement Agreement, the $1.5 million initial retainer was a general retainer. First, the Payment was in exchange for Defendant’s availability and not for specific services. The Engagement Letter states that “Barclays hereby accepts the engagement” and “if requested by Spansion” will perform any of a menu of financial advisory services described therein. See Engagement Agreement ¶ 2. Although the Engagement Agreement does not specifically mention “availability,” that exact language is not necessary for a general retainer. See Ryan, 193 F.3d at 216-17 (finding general retainer even though contract did not use term “available” where “on its face [the contract required the professional] to be available to handle an indeterminate amount of litigation”). The $1.5 million retainer was for Defendant’s availability, if and when Spansion needed financial services. See Engagement Agreement ¶ 2.

Second, the Engagement Agreement sets out the $1.5 million retainer separate from the paragraphs describing payment for specific services and milestones, such as separate payments for opinions and consummated transactions (although the amount of the initial retainer would be subtracted from such additional fees), Compare Engagement Agreement ¶ 4(a) (“Upon the commencement of the engagement entered into between Spansion and Barclays Capital pursuant to the delivery and execution of this agreement, Spansion shall pay Barclays an initial retainer fee of $1.5 million.”) with Engagement Agreement 41 4(c)-(e) (providing for payment of additional fees). See Ryan, 193 F.3d at 217 (finding general retainer where “contract specifically outline[d] in a separate clause from the one providing for the $1 million retainer” how client would pay for professional’s services going forward); Gray’s Run, 217 B.R. at 55 (finding advance fee retainer where agreement did not set apart “amount that could be interpreted as consideration separate from counsel’s hourly rate”).

Finally, nothing in the Engagement Agreement suggests that Defendant was obligated to subtract amounts from the $1.5 million initial retainer on a per diem basis or return amounts not used. Cf. ACandS, 297 B.R. at 401 (finding special retainer where parties understood that if services were not performed professional would return unused portion); Glassman v. Heimback Spitko & Heckman (In re Spitko), 2007 B.R. 1720242, at *7 (Bankr. E.D. Pa. June 11, 2007)(retainer was special retainer where professional subtracted amounts charged on regular basis as services were rendered). The fact that additional monthly retainers were required starting six months later simply demonstrates that the $1.5 million initial retainer payment did not secure Defendant’s availability in perpetuity; it secured Defendant’s availability for up to six months.

Plaintiff’s allegation that Spansion Inc. did not receive reasonably equivalent value for the $1.5 million retainer is premised on Plaintiff’s contention that the Engagement Agreement required Defendant to be compensated on a per diem basis. The Engagement Agreement contradicts that allegation, and therefore the Court should not accept Plaintiffs allegation as true. See Six Flags, 443 B.R. at 337 (“[a]lthough [plaintiff] has pled sufficient facts taken as true to support its claims, the [document] contradicts the allegations and controls”). Because Plaintiffs allegation of lack of reasonably equivalent value is not plausible, the Amended Complaint fails to state a claim for fraudulent transfer.

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