Litigation Coverage: Court Allows Millennium Trust’s Fraudulent Transfer Claims to Recover $35M in 2014 Loan Arrangement Fees to Proceed to Trial

Relevant Document:
Opinion

Today Judge Laurie Selber Silverstein denied four former Millennium Health advisors’ motion for summary judgment on the litigation trust’s claims to claw back $35.3 million in arrangement fees related to the company’s 2014 leveraged loans, finding that genuine issues of material fact remain for trial related to the company’s intent and solvency at the time of the transaction.

The litigation trust alleges that the $1.4 billion in loans used to pay dividends to shareholders left Millennium “with inadequate funds to satisfy the substantial additional liabilities” arising from Millennium’s “illegal business practices,” leading to the company’s November 2015 chapter 11 filing. According to the trust, because Millennium did not receive any of the proceeds of the dividend recap loans, it did not receive any value from the advisors in exchange for arranging those loans.

The trust also sued the arrangers for securities fraud on behalf of the lenders, alleging they misrepresented or omitted material facts, including government investigations into the company’s business practices, in offering materials. In May 2020, U.S. District Judge Paul Gardephe dismissed those claims, finding that leveraged loans are not “securities”; in August 2023 the U.S. Court of Appeals for the Second Circuit agreed. The U.S. Supreme Court declined to hear the case in February.

Judge Silverstein denied the advisors’ motion to dismiss the arrangement fees claims in February 2019. In her opinion denying summary judgment, the judge finds that the trust’s intentional and constructive fraudulent transfer claims should proceed to trial.

First, Judge Silverstein finds the trust presented sufficient evidence to infer the arrangement fees were paid as part of a transaction intended to hinder, delay or defraud creditors. The judge cites evidence that Millennium’s decisionmakers stood to benefit from the dividends, the company knew of potential government claims related to its business practices, and the company misled investors by characterizing the transaction as a “Bank Refinancing” when it was always “a way to provide a return to its stockholders.”

Second, Judge Silverstein rules that the trust presented sufficient evidence of insolvency to proceed to trial on the constructive fraud claims. The judge specifically finds that the trust’s expert testimony on insolvency is based on sufficiently reliable valuation methodology to avoid exclusion prior to trial.

Finally, Judge Silverstein concludes that the trust presented sufficient evidence that Millennium did not receive reasonably equivalent value for the arrangement fees. When the two steps of the transaction – the incurring of the loans and payment of the dividends – are collapsed, the end result is that Millennium took on $1.4 billion in debt to pay the dividends and received nothing in return, the judge explains.

The defendants maintain Millennium received value for their market-rate arrangement fees in the form of a successfully syndicated loan, Judge Silverstein recounts. However, according to the judge “market based fees are not per se reasonably equivalent value” for a transaction that may have provided no benefit to the company.