Mitsubishi Power Systems Americas, Inc. v. Babcock & Brown Infrastructure Group US, LLC, et al.,(April 24, 2009), read revised letter decision here. The Chancery Court heard a motion for temporary restraining order on April 22, 2009 by telephone conference, and issued this written decision on Friday, April 24, 2009. (The letter opinion was issued that day, and revised over the weekend). The actual TRO order is here. The TRO was granted to prevent potentially fraudulent transfers.
Mitsubishi Power Systems Americas, Inc. ("MPSA") is engaged in the manufacture and sale of, among other things, the manufacture of wind turbines for electrical power. The Babcock defendants are part of an investment group based in Australia. One of its subsidiaries, BBIG, entered into a pair of agreements with MPSA to manufacture wind turbines ("TSAs"). MPSA required another Babcock subsidiary, BBIPL, to guarantee the obligation of BBIG under the TSA. Progress payments were due on the TSAs which BBIG failed to make, and MPSA claims nearly a billion dollars in damages.
BBIPL experienced financial difficulties and agreed on February 6, 2009 to sell its assets and those of its subsidiaries, and provide those proceeds to its senior secured lenders ("Agreed Asset Sales Program"). However, the security of those lenders does not extend to the assets of BBIG. In March 2009, the Babcock parent entity in Australia had been placed into administration, the rough equivalent in the U.S. of a Chapter 11 bankruptcy. During the foregoing period, the parties were trying to reach an amicable resolution.
On April 8, 2009, MPSA learned from a trade publication the Babcock was selling assets on or about May 8, 2009, that would result in the dissipation of assets that would be available to satisfy creditors of BBIG (including MPSA). The next day, April 9, 2009, MPSA filed suit in Chancery Court alleging that BBIG engaged in fraudulent transfers to affiliates of certain assets for less than fair market value, made improper distributions under Section 18-607(a) of the Delaware Limited Liability Company Act, as well as claiming breach of contract.
In addition to the complaint on April 9, MPSA filed a motion for preliminary injunction and a motion for expedited proceedings in order to develop a record in time for a ruling on the motion by a proposed sale date. The expedited schedule, that was granted, call for all discovery to completed in less than one month, on May 6 (two days prior to the expected sale sought to be enjoined).
Expedited discovery began on April 13. The parties were only able to agree to a short-term "Status Quo Order" that expired on April 22, thus on April 20, MPSA moved for a temporary restraining order, seeking to enjoin any transfers by the Babcock entities outside of the normal course of business, with the exception of assets sold for fair market value. For those proceeds, MPSA sought to have them held in escrow.
The court discussed the procedural distinction made between applications for a TRO compared to a preliminary injunction. See, e.g., footnote 7. The court reasoned that :
(i) MPSA stated a colorable claim for breach of contract;
(ii) Importantly, the court ruled that: "The threat of a fraudulent transfer will constitute irreparable harm warranting injunctive relief" (citing The Delaware Uniform Fraudulent Transfer Act (the "DUFTA"); 6 Del. C. section 1307(a)). Thus, in order to establish imminent, irreparable harm, MPSA needed to establish a colorable claim that BBIG intended to engage in one or more fraudulent transfers in the future, and the court found that they did.
In order to find a colorable claim of a fraudulent transfer, the court reviewed the definitions in Section 1305 of the DUFTA as well as the definition of "insolvency" under Section 1302 of the DUFTA. Because BBIG’s assets appeared to be about $60 million and it owed MPSA about $86 million–and was not able to pay MPSA as its bills became due, there was a presumption that BBIG was insolvent. In addition, the court noted that if BBIG is in fact insolvent, ‘any future transfer to BBIG’s parent entities, as insiders, on account of preexisting intercompany debt would be fraudulent per se." (see footnote 15, citing 6 Del. C. section 1305(b)).
The court also observed that "because a defrauded creditor may seek recovery not only from the transferor but from a transferee as well" (see footnote 20), MPSA may seek to enjoin transfers to BBIPL and related entities through which the funds passed.
(iii) The third prerequisite for issuing a TRO, the "balance of the equities", was satisfied, because as to BBIG alone, the court was:
"convinced that the equities of a temporary restraint against upstream transfers falls in MPSA’s favor. Such a restraint would not prohibit BBIG from engaging in asset sales to third parties for fair value. It simply requires that the proceeds of such sales be placed in escrow pending further consideration of these claims on a motion for preliminary injunction."