Official Comm. of Unsecured Creditors of Fedders North America, Inc., et al. v. Goldman Sachs Credit Partners L.P. (In re Fedders North America, Inc.), 405 B.R. 527  (Bankr. D. Del. 2009)

 After nearly 100 years as a metalworking shop and later an air conditioner supplier, Fedders’ business began to deteriorate in the early 1990s.  Over the next 10 years, the company embarked on a new campaign to move into growth industries that were traditionally not part of its operations, such as commercial HVAC and indoor air quality.  It also moved much of its production to overseas plants.  Fedders incurred substantial debt in pursuit of this strategy.  By February 2007, Fedders was in default on a $75 million secured credit facility, which led to a liquidity crisis.

 Fedders was able to secure some new financing, however it was not enough to save the company.  On August 22, 2007, Fedders filed for relief under chapter 11 of the Bankruptcy Code.  Prior to confirmation of a plan of liquidation, the Official Committee of Unsecured Creditors was granted derivative standing to pursue a complaint against various directors and lenders, asserting, among other things (i) that fraudulent conveyances were made to the defendants and (ii) the defendants aided and abetted the consummation of the fraudulent transfers.  The Creditors’ Committee claimed, among other things, that the defendants actually intended the alleged transfers to hinder, delay or defraud their creditors.   Defendants moved to dismiss for failure to state a claim.

  The bankruptcy court granted the motion to dismiss on both counts.  It first noted that for actual fraud claims direct evidence is not often forthcoming and that courts may infer actual intent by examining the circumstances and determining whether certain “badges of fraud” are present.  Those badges include the (i) relationship between the debtor and the transferees, (ii) consideration given, (iii) insolvency of the debtor, (iv) percentage of debtor’s estate transferred, (v) reservation of control or (vi) dominion over the transferred property and concealment of the transaction.  The bankruptcy court stated that although the presence of a single factor may cast suspicion, several badges are typically required to provide conclusive evidence of intent to defraud.  Here, the only badge pled by the Creditors’ Committee was the insolvency of the debtor, which the bankruptcy court found insufficient to support a claim of actual fraudulent intent against the lenders.

 The bankruptcy court also held that the cause of action for aiding and abetting a fraudulent conveyance does not exist under the Bankruptcy Code.  It noted that although some state courts have recognized such a cause of action, there is no such liability as a matter of federal law under the Bankruptcy Code.  The Bankruptcy Code “only permits the trustee to avoid a fraudulent transfer,” and could not be used to assert a claim, such as aiding and abetting, seeking damages under state law.  Accordingly, the bankruptcy court dismissed the claim for aiding and abetting a fraudulent conveyance.

 Commentary: It is not uncommon for Creditors’ Committees, especially in large cases, to sue lenders and directors of the debtor alleging a variety of causes of action against them.  The bankruptcy court in Fedders has drawn a line in the sand for debtors and Creditors’ Committees in bringing avoidance actions.  If the bankruptcy court had recognized a cause of action for aiding and abetting a fraudulent conveyance, the range of parties against which avoidance actions can be brought under the Bankruptcy Code, would have been significantly expanded.