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Mitsubishi Power Systems Americas, Inc. v. Babcock & Brown Infrastructure Group US, LLC, C.A. No. 4499-VCL (Del. Ch. Apr. 27, 2009) (Lamb, V.C.) (Letter opinion)

April 27, 2009

In this decision, the Court of Chancery considered a motion for a temporary restraining order (“TRO”) submitted by Mitsubishi Power Systems Americas, Inc. (“MPSA”) seeking to enjoin transfers by the defendants, a group of related entities (the “Babcock entities”) under parent entity Babcock & Brown Limited (“BBL”), formerly traded on the Australian Stock Exchange. MPSA entered into a pair of Turbine Supply Agreements (the “TSAs”) in 2007 and 2008 with one of the Babcock entities, Babcock & Brown Infrastructure Group US, LLC (“BBIG”). At MPSA’s request, the operating subsidiary of the Babcock entities, Babcock & Brown International Party Limited (“BBIPL”) guaranteed the obligations of BBIG under the TSAs. The TSAs also required BBIG to make progress payments to MPSA upon the achievement of certain milestones. BBIG failed to make any progress payments on either TSA due to financial difficulties stemming from the effects of the credit crisis on BBIPL’s ability to finance the business. Eventually, MPSA suspended production under the TSAs, and MPSA claimed that as a result, it suffered nearly $1 billion in damages. After several attempts to turn the business around, BBL placed the company in “voluntary administration” (the Australian equivalent of Chapter 11 bankruptcy). MPSA became concerned that the assets of BBIG were being dissipated to pay BBIPL’s senior secured lenders and learned that the Babcock entities were selling certain assets that MPSA believed should be available to satisfy the creditors of BBIG (including MPSA).

MPSA then filed a complaint in the Court of Chancery alleging that BBIG had engaged in fraudulent transfers to affiliates of certain assets for less than fair value, that BBIG had made improper distributions under the Delaware Limited Liability Company Act, and two alternative theories of its breach of contract claim against BBIG. In addition, MPSA filed a motion for expedited proceedings and a motion for a preliminary injunction, and also sought a highly expedited discovery schedule in support of its motion to preliminarily enjoin certain proposed asset transfers. The Court encouraged the parties to come to an agreement as to a status quo order (which they were able to do in the short term) and a less onerous discovery schedule. Concerned about the impending expiration of the status quo order, MPSA moved for a TRO.

In determining whether to grant the TRO, the Court noted that once a threat of imminent, irreparable injury is shown, the Court will issue the TRO unless (i) the claim asserted on the merits is frivolous or not truly litigable, (ii) that the risk of harm in granting the remedy is greater than the risk to plaintiff of denying it, or (iii) the plaintiff has not proceeded promptly and has therefore contributed to the emergency nature of the application. Despite argument by defendants to apply the more stringent standard applied in connection with preliminary injunction applications, the Court held that the normal “colorable claim” standard was applicable to evaluate whether MPSA’s claims were meritorious because MPSA had not yet had an opportunity to develop the fact record. Because BBIG acknowledged in its briefs that it breached the TSAs, MPSA stated a colorable claim on its breach of contract claim against BBIG.

With respect to its fraudulent transfers claim, MPSA had to demonstrate a colorable claim that BBIG intended to engage in fraudulent transfers in the near future. Under the Delaware Uniform Fraudulent Transfer Act, 6 Del. C. § 1301 et. seq., a debtor makes a fraudulent transfer as to a creditor, whose claim arose before the transfer, if (i) the debtor did not receive reasonably equivalent value in exchange for the transfer and was insolvent (i.e., the value of its debts were greater than its assets) at the time of the transfer) or (b) the debtor made the transfer to an insider for antecedent debt and the debtor was insolvent. The Court concluded that BBIG was insolvent. Further, the Court found that BBIG was seeking to sell and had sold certain of its assets and BBIPL may cause the proceeds for those sales to be used to repay BBIPL’s senior secured debt. Thus, the Court concluded that MPSA stated a colorable claim based on the fraudulent transfers. As to the balancing of equities, the Court concluded that a restraint against the Babcock entities as a whole would be too broad because it might trigger loan defaults and liquidation. Unwilling to expose the Babcock entities to this risk, the Court granted a limited TRO prohibiting BBIG from transferring any assets other than in the ordinary course, except that it would be permitted to pursue third-party asset sales so long as any proceeds from those sales were kept in escrow. The Court also required MPSA to post a bond against harm defendants might suffer as a result of the improvident grant of the TRO.

The full opinion is available here