ARTICLE
8 November 2024

Second Circuit Reinstates Fraudulent Transfer Claim Against Debtor's Lenders

On July 8, 2024, the U.S. Court of Appeals for the Second Circuit reversed, in a summary order, the dismissal of fraudulent transfer claims brought by the purported contract...
United States Criminal Law

On July 8, 2024, the U.S. Court of Appeals for the Second Circuit reversed, in a summary order, the dismissal of fraudulent transfer claims brought by the purported contract creditor of a shipping company against the shipping company's parent's lenders. Eddystone Rail Company alleged that, after it entered into a rail services agreement with Bridger Transfer Services, LLC, Bridger was acquired by Ferrellgas, L.P., which then transferred Bridger's assets to affiliated entities to make Bridger judgment proof and to cause Bridger to default on its obligations to Eddystone. Eddystone alleges that Ferrellgas used the proceeds of its transfer to repay loans to two groups of lenders, one led by Bank of America and another by TPG Specialty Lending, Inc. Eddystone sued the lenders in New York state court to recover the payments as fraudulent transfers. The lenders removed the case to federal court, which then dismissed the claims and denied Eddystone leave to replead.

On appeal, the Second Circuit first concluded that the lenders' removal of the case was proper under the Edge Act, which confers federal court jurisdiction over civil actions to which a federally-chartered bank is a party and that involve "international or foreign banking." The court held that the Edge Act applied to Eddystone's claims because the administrative agent for one of the lender groups, Bank of America, is federally-chartered and the banking activities included BoA's distribution of loan payments to participating lender The Bank of Tokyo-Mitsubishi UFJ, Ltd., a foreign bank. The court noted that the distributions to the foreign lender was sufficient to satisfy the Edge Act, even though the underlying transactions were entirely domestic.

On the merits, the Second Circuit disagreed with the district court—which found "conclusory" the allegation that the payments to the lenders came from the Bridger transfer—and held that Eddystone sufficiently stated fraudulent transfer claims against both lender groups. The appellate court determined that Eddystone specifically alleged that the source of the payments to the lenders was the transfer of Bridger assets. While that allegation may prove untrue, the court held, it was sufficient to state a claim.

The case is Eddystone Rail Co. v. Bank of America, N.A., No. 23-561-cv (2d Cir. July 8, 2024). Eddystone is represented by Cohen & Gresser, LLP. The lender groups are represented by Davis Polk & Wardwell LLP and Schulte Roth & Zabel LLP. The opinion is available here.

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