C&G Wins Appeal in Second Circuit
July 25, 2024
With the financial assurance of a multi-year take-or-pay contract that obligated BTS to make minimum monthly payments regardless of the services it used, Eddystone spent about $170 million to build a transloading facility that transferred oil from railcars to boats. Soon after the Eddystone transloading facility went into operation, BTS and many of its corporate affiliates were sold to Ferrellgas. At the time, BTS’s value was well over $200 million. Within months, though, the transloading arrangement became uneconomical for BTS’s corporate affiliates, so Ferrellgas stripped all of BTS’s assets and sold BTS for $10, causing BTS to default on its remaining obligations to pay Eddystone about $140 million. Eddystone brought an action in Philadelphia in 2017 to recover the fraudulent transfers involved in stripping BTS’s assets.
While the Philadelphia initial transfer action was pending, C&G filed an action for Eddystone in the Southern District of New York in 2019 alleging that Ferrellgas used former BTS assets to pay two groups of lenders, making the lenders subsequent transferees of the fraudulently transferred assets. Significantly, a protective order in the Philadelphia action barred Eddystone from using documents produced in that action in drafting its initial complaint against the lenders.
The Southern District granted the lenders’ initial motions to dismiss the complaint, finding that the complaint did not sufficiently demonstrate that the assets used to pay the lenders derived from former BTS assets. However, the court also rejected all of the lenders’ many additional arguments that the complaint was legally insufficient.
Following the dismissal of the initial complaint in September 2021, Eddystone overcame hard-fought opposition to get the protective order in the Philadelphia action modified in March 2022 to permit it to use discovery from that action to amend its Southern District complaint against the lenders. Eddystone then prepared a proposed amended complaint in April 2022 with charts showing specific cash transfers from BTS to one set of lenders through Ferrellgas and its subsidiaries. The proposed amended complaint also detailed how other specific BTS assets were assigned to corporate affiliates for no consideration at all and how the proceeds from later sales of those assets were transferred to another set of Ferrellgas lenders.
The Southern District nevertheless denied Eddystone leave to file the proposed amended complaint, finding that it would be futile because the factual allegations were still insufficient to show that assets from BTS reached the lenders. The court also found that the three years between Eddystone’s filing of its initial complaint and its request to amend was an undue delay that prejudiced the lenders.
Following oral argument that Judge Gerard Lynch of the Second Circuit called “great,” the Second Circuit reversed the District Court on both of its bases for denying Eddystone’s request to file an amended complaint. First, the Second Circuit found that Eddystone had alleged sufficient details to show that it was plausible that BTS’s assets were later transferred to the lenders. Then, the Second Circuit ruled that the District Court had exceeded its discretion in finding that undue delay and prejudice barred Eddystone’s effort to amend its complaint, finding that the District Court had not identified any prejudice to the lenders and that “Eddystone cannot be penalized for waiting until it received the District Court’s decision granting the motions to dismiss before determining what it needed to do to amend its Complaint, including modifying the protective order in the Pennsylvania litigation.”
The victorious C&G team includes Dan Tabak, Steve Sinaiko, Marvin Lowenthal, Ben Zhu, and Camille Delgado. Melissa Maxman was also part of the team that obtained the modification of the Pennsylvania protective order.