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Superior Court Upholds Claims that Entities Transferred Funds in Violation of Agreements with Creditor

CIBC Bank USA v. JH Portfolio Debt Equities, LLC, C.A. No. N18C-07-130 EMD CCLD (Del. Super. June 2, 2021)

Plaintiff CIBC Bank USA (“CIBC”) entered into a credit agreement with a group of borrowers to provide them with a revolving line of credit that was secured via a security agreement, which granted CIBC a priority interest in certain collateral. Under the security agreement, the borrowers agreed not to take any actions that would materially impair the collateral, or to permit any of their subsidiaries to amend their organizational documents to adversely affect the interests of CIBC. CIBC also entered into acknowledgment agreements with the borrowers’ joint venture partners, under which those partners agreed not to amend their own agreements with the borrowers without CIBC’s consent.

Under the borrowers’ agreements with joint venture partners, defendant JH Portfolio Debt Equities LLC (“JH”) was to make distributions to the partners based on JH’s actual collections of third-party loan obligations. Unbeknownst to CIBC, the borrowers and joint venture partners had already executed or later executed side agreements establishing more favorable terms for JH to make cash-flow distributions to the partners. The borrowers later defaulted under the credit and security agreements with CIBC. CIBC accelerated amounts owed, demanded immediate repayment, and filed suit against the borrowers, joint venture partners, and lenders to the joint ventures. Defendants sought dismissal of all claims.

The Court first ruled that it had personal jurisdiction over all defendants, including JH. The formation and management of the joint venture entities in furtherance of the alleged wrongdoing constituted the transaction of business in Delaware to exercise personal jurisdiction under Delaware’s long-arm statute. Exercising personal jurisdiction comported with due process based on the transaction of such business, JH’s receipt of distributions from the entities, and the Delaware choice-of-law provisions in the joint venture agreements.

The Court subsequently upheld the legal sufficiency of certain claims, but dismissed others. The Court found that CIBC had properly pled fraudulent transfer claims, reasoning that the transfers of interests among statutorily-defined “insiders” were concealed, and caused or followed soon after JH’s insolvency. CIBC also adequately pled claims for constructive fraudulent transfer because JH was allegedly insolvent or rendered insolvent by the transfer, and JH had allegedly not received reasonably equivalent value in the transfer. Further, the Court sustained CIBC’s claims against the joint venture lenders, reasoning that the acceptance of a fraudulently transferred asset may be sufficient to create transferee liability. The Court dismissed CIBC’s implied covenant claim because the conduct challenged was covered by the explicit terms of a contract. Finally, the Court sustained a declaratory judgment claim because it related to prospective harm, and was therefore not duplicative of the contract claims for past harm.

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