Delaware Bankruptcy Court Allows Debtor's Suit Against Seller in LBO to Proceed

On March 17, 2010, Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware denied a motion to dismiss an adversary proceeding in the Mervyn’s Chapter 11 cases (In re Mervyn’s Holdings LLC, Case No. 08-11586, Adv. Proc. No. 08-51402) in which one of the debtors, Mervyn’s LLC acting through its Official Committee of Unsecured Creditors, asserted fraudulent conveyance and breach of fiduciary duty claims against Target Corporation related to Target’s sale of Mervyn’s in a 2004 LBO. This decision is noteworthy because the Court, resisting a recent judicial trend protecting sellers in these transactions, held that the Section 546(e) safe harbor for “settlement payments” did not shelter a LBO seller from fraudulent conveyance claims in light of the Court’s decision to collapse the various transactions into a single conveyance. The decision is also significant because, with respect to the breach of fiduciary duty claims, the Court held that (1) under California law (Mervyn’s is a California LLC), Target -- as a member of the LLC -- owed a fiduciary duty to Mervyn’s and its creditors and (2) Delaware’s borrowing statute was inapplicable where the statute of limitations of the jurisdiction in which the action arose is longer than that of Delaware.