AP Services v. Silva

U.S. DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Bankruptcy

New York Law Journal

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Judge Lewis Kaplan

Chem Rx Corp. sought bankruptcy in 2010, three years after its 2007 leveraged buyout (LBO) of Chem Rx from principal shareholders the Silvas through Paramount Acquisition Corp. Lenders providing Chem Rx $177 million used to buy the Silvas' stock allegedly relied on misinformation by the Silvas about Chem Rx's financial history. Under Bankruptcy Code §554(b) AP Services, the trustee of the Chem Rx Litigation Trust—created to pursue claims on behalf of Chem Rx's bankruptcy estate—sought recovery of transfers in connection with the LBO. It claimed the Silvas' stock transfers to Paramount to be fraudulent in that they lacked fair consideration, were intended to defraud Chem Rx's creditors, and rendered Chem Rx insolvent. The trustee further alleged the Silvas' breach of fiduciary duties to Chem Rx by causing it to incur debt they knew could not be repaid. The court dismissed the trustee's claims. Discussing the Second Circuit's decision in Enron Creditors Recovery v. Alfa and the Third's in In re Plassein International, district court determined the payments they received for their stock constituted "settlement payments" protected from avoidance by the "safe harbor" provisions of Bankruptcy Code §546(e).

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