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Greektown Holdings, LLC v. Papas

United States District Court, E.D. Michigan, Southern Division

January 23, 2018

BUCHWALD CAPITAL ADVISORS, LLC, Litigation Trustee for the Greektown Litigation Trust, Appellant,
v.
DIMITRIOS (“JIM”) PAPAS, et al., Appellees. BUCHWALD CAPITAL ADVISORS, LLC, solely in its capacity as Litigation Trustee for the Greektown Litigation Trust, Plaintiff,
v.
DIMITRIOS (“JIM”) PAPAS, et al., Defendants. Adv. Pro. 10-05712

         On Appeal From the United States Bankruptcy Court For the Eastern District of Michigan

          Walter J. Shapero Bankr. Judge

          OPINION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S NOVEMBER 24, 2015 OPINION AND DECEMBER 23, 2015 ORDER GRANTING THE PAPAS AND GATZAROS DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AND DISMISSING THEM WITH PREJUDICE FROM THE ADVERSARY PROCEEDING.

          Paul D. Borman United States District Judge.

         This appeal arises out of the Greektown Holdings, LLC Bankruptcy proceedings (Bankr. Case No. 08-53104), specifically out of Bankruptcy Adversary Proceeding No. 10-05712, Buchwald Capital Advisors, LLC, solely in its capacity as Litigation Trustee to the Greektown Litigation Trust v. Dimitrios (“Jim”) Papas, Viola Papas, Ted Gatzaros, Maria Gatzaros, Barden Development, Inc., Lac Vieux Desert Band of Lake Superior Chippewa Indians, Kewadin Casinos Gaming Authority, and Barden Nevada Gaming, LLC, in which the Plaintiff, Buchwald Capital Advisors, LLC, Litigation Trustee for the Greektown Litigation Trust (“the Litigation Trustee”), seeks to avoid certain transfers made to the Defendants that are alleged to have been fraudulent and therefore avoidable under 11 U.S.C § 544, which incorporates Michigan's Uniform Fraudulent Transfer Act, Mich. Comp. Laws §§ 566.31, et seq. At issue in this appeal are approximately $155 million in wire transfers made in 2005 - approximately $95 million in a transfer to Dimitrios and Viola Papas (the Papases) and approximately $60 million in a transfer to Ted and Maria Gatzaros (the Gatzaroses) (hereinafter collectively referred to as “the Papas and Gatzaros Defendants”) (“the Wire Transfers”).

         The Bankruptcy Court, in its November 24, 2015 Opinion, concluded that the Wire Transfers were protected from avoidance under Section 546(e) of the Bankruptcy Code, 11 U.S.C. § 546(e), a “safe harbor” provision that bars a trustee's avoidance of transfers that are “settlement payments” made by or to (or for the benefit of) a financial institution and bars avoidance of transfers that are made by or to (or for the benefit of) a financial institution in connection with a securities contract. The Bankruptcy Court granted the Papas and Gatzaros Defendants' motion for summary judgment and dismissed them from the Adversary Proceeding with prejudice on December 23, 2015.

         On appeal, the Litigation Trustee argues: (1) that the Bankruptcy Court improperly weighed evidence and made erroneous factual findings in reaching its summary judgment conclusion that the Wire Transfers are entitled to safe harbor protection under Section 546(e); and (2) that the Wire Transfers were in fact dividend payments, not settlement payments, which were not made in connection with a securities contract and were not made “by” or “to” a financial institution, and thus were not entitled to safe harbor protection under Section 546(e) and are therefore avoidable under Section 544 and ultimately recoverable from the Papas and Gatzaros Defendants as “initial transferees” under Section 550(a)(1). The Papas and Gatzaros Defendants respond that: (1) all of the material facts that demonstrate the applicability of Section 546(e) to the Wire Transfers are undisputed; and (2) the Wire Transfers were “settlement payments, ” not dividends, and were made in connection with a securities contract and were made by a financial institution, and thus are entitled to safe harbor protection under Section 546(e).

         I. BACKGROUND

         A. Procedural Background

         On May 29, 2008, Greektown Casino LLC (“Greektown Casino”), Greektown Holdings LLC (“Holdings”), and other related entities filed their Chapter 11 bankruptcies. (ECF No. 5, Designated Bankruptcy Proceeding, PgID 116.)[1] On May 27, 2010, the Official Committee of Unsecured Creditors commenced the Adversary Proceeding from which this appeal arises, seeking to avoid, among other things, Wire Transfers made in 2005 to Papas and Gatzaros. (ECF No. 5, PgID 114-150.) The Committee brought the action under 11 U.S.C. §§ 544 and 550 and two provisions of the Michigan Uniform Fraudulent Transfers Act (“MUFTA”), Mich. Comp. Laws §§ 566.34 and 56.35. (ECF No. 5, PgID 114-150.) Buchwald Capital Advisors, LLC (the “Litigation Trustee”) later substituted for the Committee.

         Under 11 U.S.C. § 544(b), the Litigation Trustee is empowered to avoid transfers made by a debtor that could be avoided by an unsecured creditor under applicable state law.[2] The Litigation Trustee relies on the following provisions of MUFTA in bringing the claims in this Adversary Proceeding: (1) Mich. Comp. Laws § 566.34(1)(b), which permits avoidance of transfers made without receiving reasonably equivalent value in exchange for the transfer if, on the date of the transfer, the debtor knew or reasonably should have known that it would incur debts beyond its ability to pay as a result of the transfer (§ 566.34(1)(b)(ii)); and (2) Mich. Comp. Laws § 566.35, which permits avoidance of transfers made without receiving reasonably equivalent value in exchange for the transfer if the debtor was insolvent or became insolvent as a result of the transfer. The Litigation Trustee argues that the 2005 Wire Transfers were dividends made by Holdings to its owners, who subsequently and without legal compulsion used the funds to satisfy their outstanding debt obligations to Papas and Gatzaros Defendants. The Litigation Trustee argues that the dividends from Holdings to its owners were made without receipt by Holdings of reasonably equivalent value and were made at a time when Holdings knew or should have known that making the transfer would render it unable to pay its debts and/or at a time when Holdings was insolvent or that Holdings became insolvent as a result of the transfer. The Litigation Trustee seeks to avoid the “dividend” transfers from Holdings to its owners under 11 U.S.C. §544(b) and Mich. Comp. Laws §§ 566.34 and 566.35, and to recover those avoided amounts from the Papas and Gatzaros Defendants as the initial transferees of those voided transfers under 11 U.S.C. § 550.

         On April 25, 2012, the Papas and Gatzaros Defendants moved in the Bankruptcy Court Adversary Proceeding for summary judgment on the ground that the Wire Transfers were protected from avoidance by the Litigation Trustee by 11 U.S.C. § 546(e). (ECF No. 5, PgID 211-237.) Section 546(e) is a “safe harbor” provision that prevents a trustee from avoiding certain security-related transfers. The Litigation Trustee opposed the motion. (ECF No. 5, PgID 359-578.) The Papas and Gatzaros Defendants filed a Reply in support of their Safe Harbor motion. (ECF No. 5, PgID 587-607.) On August 15, 2012, the Bankruptcy Court held a hearing on the motion. (ECF No. 5, PgID 608-670, Transcript of 8/15/12 Hearing.) The Papas and Gatzaros Defendants then submitted supplemental post-hearing briefing, (ECF No. 5, PgID 671-692, ) as did the Litigation Trustee, (ECF No. 5, PgID 696-717).

         On November 24, 2015, after the failure of several different efforts to resolve certain aspects of the underlying Adversary Proceeding through settlement, the Bankruptcy Court entered the Opinion and Order that are the subject of this appeal. United States Bankruptcy Judge Walter J. Shapero found that the Wire Transfers to the Papas and Gatzaros Defendants were protected from avoidance by the safe harbor provision, granted the Papas and Gatzaros Defendants' motion for summary judgment and dismissed them from the MUFTA Adversary Proceeding. (ECF No. 5, PgID 836-72.) The Litigation Trustee filed its Notice of Appeal on December 8, 2015, and filed its Amended Notice of Appeal on January 4, 2016. (ECF No. 5, PgID 53-99.) The Papas and Gatzaros Defendants filed a Notice of Cross-Appeal, which was withdrawn by stipulation of the parties on April 26, 2016. (ECF No. 11.)

         This Court held a hearing on the appeal on February 27, 2017. On March 2, 2017, the Court ordered the parties to participate in facilitative mediation. (ECF No. 22, Order of Referral to Facilitative Mediation.) The parties did attempt to resolve this matter, engaging in a facilitation before former United States District Chief Judge Gerald R. Rosen in combination with the facilitation of a related bankruptcy appeal arising out of the same Adversary Proceeding, Greektown Holdings, LLC v. Sault Ste. Marie Tribe of Chippewa Indians, et al., E.D. Mich. No. 16-13643, also currently pending before this Court and resolved in a separate Opinion and Order issued this same day. On September 26, 2017, the parties informed this Court that the combined facilitation was unsuccessful, necessitating the Court's resolution of this appeal.

         B. Factual Background

         The Greektown Casino was licensed by the Michigan Gaming Control Board (“MGCB”) to own and operate a casino in downtown Detroit, Michigan, which opened for operation in November, 2000. (ECF No. 13, PgID 2134.)[3] The Papas and Gatzaros Defendants, prior to 2000, owned 86% of the membership interests of Monroe Partners, LLC (“Monroe”). (ECF No. 5, PgID 963; ECF No. 13, PgID 2418.) Monroe owned 50% of Greektown Casino and Kewadin Greektown Casino, LLC (“Kewadin”) owned the other 50% of Greektown Casino. (ECF No. 5, PgID 965.) The Kewadin Casino Gaming Authority (“the Authority”) owned 100% of Kewadin and the Sault Ste. Marie Tribe of Chippewa Indians (“the Tribe”) owned 100% of the Authority. (ECF No. 5, PgID 965, 1131; ECF No. 12, PgID 2089.)

         On July 28, 2000, the Papas and Gatzaros Defendants each entered into an Amended and Restated Limited Liability Company Redemption Agreement with Monroe according to which Monroe redeemed all membership interests of Papas and Gatzaros in exchange for specified installment payments (the “2000 Redemption Agreements”). Kewadin purchased the membership interests that were transferred by the Papas and Gatzaros Defendants to Monroe, and became obligated along with Monroe to satisfy the redemption obligations to the Papas and Gatzaros Defendants. (ECF No. 13, PgID 2340-2447; ECF No. 13, PgID 2448-87.)

         Under the terms of the July 28, 2000 Redemption Agreements, Papas and Gatzaros surrendered their membership interests in Monroe:

(e) Effect of Closing. It is the intention of the Parties that the redemption of the Retiring Member's Redeemed Monroe Interests pursuant to this Agreement shall completely divest the Retiring Member of all authority, influence, control, rights and benefits associated with such Redeemed Monroe interests. This means that, without limitation, from and after the Closing, the Retiring Member shall not retain an interest in, or be entitled to receive any distributions of, any membership interests or assets of Monroe, except the Retiring Member's allocable portion of the Redemption Amount.

(ECF No. 13, July 28, 2000 Amended and Restated Limited Liability Company Redemption Agreement among Monroe and Papas, PgID 2354.)

         Between July 2000 and June 2005, Papas and Gatzaros received more than $66 million in payments under the 2000 Redemption Agreements. (ECF No. 13, PgID 2530-31.) None of these payments are challenged in the underlying Adversary Proceeding. However, during this time period, Monroe did default on its installment payments to the Papas and Gatzaros Defendants and the debt owed under the 2000 Redemption Agreements was restructured several times. (ECF No. 13, PgID 2490.)

         In November, 2004, Papas and Gatzaros each entered into a Confidentiality and Standstill Agreement with Monroe, the Authority, the Tribe, Kewadin and Greektown Casino to allow the parties to explore alternative solutions to Monroe's defaults, and on February 10, 2005 and March 10, 2005, the Standstill Agreements were amended further by letter agreements. (ECF No. 13, PgID 2488-89, PgID 2506-08.) Through the letter agreements, the Papases agreed to a discounted cash buy-out of $94, 860, 000 (leaving $50, 000, 000 outstanding) and the Gatzaroses agreed to a partial payment of $55, 000, 000 (leaving $50, 000, 000 outstanding). (ECF No. 13, PgID 2508.) To effectuate the debt restructuring under the modified Redemption Agreements, the transactions necessary to fund the payments to the Papas and Gatzaros had to close by December 31, 2005. (ECF No. 13, PgID 2508-09.) Papas and Gatzaros retained an option to obtain a 2% interest in Monroe (ECF No. 13, PgID 2509-10) and retained a right to “compel the sale of substantially all of the assets or the equity ownership interests in Greektown Casino owned directly or indirectly by the Sault Tribe” upon default. (ECF No. 13, PgID 2515.)

         In the summer of 2005, Greektown Casino undertook a refinancing and recapitalization of its debt, specifically the Casino's existing senior debt and the debt owed to the Papas and Gatzaros Defendants. (ECF No. 5, PgID 1046, 1094.) The transaction required the approval of the MGCB. At its September 13, 2005 Regular Meeting, proponents of the debt restructuring informed the MGCB as follows: “In order to satisfy [the redemption obligations to the Papas and Gatzaros], Greektown desires . . . to issue senior subordinated notes to satisfy these obligations.” (ECF No. 12, MGCB September 13, 2005, Regular Public Meeting, PgID 2089.) The MGCB was concerned that Greektown Casino would become liable for the redemption obligations to Papas and Gatzaros. The MGCB was also concerned that Greektown Casino, if it were to guarantee the refinancing, would have to generate sufficient revenue over the following five years to pay over $80 million to the Gatzaroses. (ECF No. 12, MGCB November 15, 2005, Special Public Meeting PgID 1146.) Thus, the MGCB rejected the transaction initially, refusing to permit Greektown Casino to become liable for any of the funds to be borrowed. (ECF No. 5, PgID 1132.)

         In response, and to satisfy the concerns of the MGCB, a proposal was made to the MGCB to form an intermediate holding company for Greektown Casino, Greektown Holdings, LLC (“Holdings”) and its subsidiary Greektown Holdings II, Inc. (“Holdings II”), to borrow the funds that would ultimately be used to make the lump sum payments to Papas and Gatzaros. (ECF No. 5, PgID 564, 1132, 1144-47; ECF No. 13, PgID 2005, 2021-35, 2134; ECF No. 12, PgID 2005, 2021-35, 2087-2109.) In a “Request for Approval of Permanent Financing” submitted to the MGCB on October 26, 2005 (“the Approval Request”), the proponents of the restructuring stated:

The sources and uses of the funds to be received by [Holdings] pursuant to the issuance of the [Senior] Notes are as follows. Please note that the proceeds from the Senior Notes (for which Greektown Casino is not liable), rather than the proceeds from the New Credit Agreement, will be used to satisfy the redemption obligations to the Papases and the Gatzaroses. Under the proposed Financing Arrangements, the direct and indirect owners of [Casino] are merely replacing the obligations to the Papases and Gatzaroses with obligations to a set of institutional investors, with no direct recourse against Greektown [Casino].

In re Greektown Holdings, 2015 WL 8229658, at *9. The letter provided that the proceeds from the Senior Notes would be used, among other things, to make payments to the Papases and Gatzaroses of approximately $93 million and $60 million respectively. Id.

         The final Order of the MGCB approving the restructuring of Greektown Casino's financing provided that Merrill, Lynch, Pierce, Fenner & Smith (“MLPFS”) had agreed to purchase $185 million in senior subordinated Notes that would be used to provide the cash to make payments to the Papases and Gatzaroses. (ECF No. 5, November 15, 2005 Order Approving Transfer of Ownership in Greektown Casino, LLC from Monroe Partners and Kewadin Greektown Casino to Greektown Holdings (“MGCB Approval Order”) at 6, PgID 1633.) The MGCB Approval Order required that Holdings use the funds obtained from the sale of the Notes as described in the Approval Request letter. (Id. at 6.) The MGCB Approval Order further provided that a failure to make the payments to the Papas and Gatzaros Defendants as outlined in the Approval Request letter would obligate the Tribe to make the payments within 30 days or the MGCB would have the right to force a sale of the Greektown Casino. (Id. at 7.) The MGCB Approval Order made clear that “Greektown [Casino LLC] will not guaranty the obligations of Greektown Holdings and Greektown Holdings II under [the Senior Notes].”

         As a condition of the restructuring, in September, 2005, Kewadin and Monroe each had conveyed their 50% ownership interest in Greektown Casino to the newly-formed Holdings and received in exchange 100% of the ownership interest in Holdings. (ECF No. 5, MGCB Order Approving Transfer of Interest, PgID 248-49.) Holdings had no other assets apart from the membership interests in Greektown Casino. (ECF No. 13, PgID 2134.)

         Following approval by the MGCB, on November 22, 2005, Holdings and Holdings II, together with their underwriter Merrill Lynch & Co. (“Merrill Lynch”) issued the Offering Memorandum for the Senior Notes in the amount of $185, 000, 000. (ECF No. 13, PgID 2128-2297.) MLPFS was the initial purchaser of the $185 million, along with Wachovia Capital Markets, LLC and NatCity Investments, Inc. (ECF No. 13, PgID 2262.) The Offering Memorandum explains that in July, 2005, “two former members of Monroe, ” i.e. the Papases and Gatzaroses, agreed to accept a discount on the payments due to them under a July, 2000 redemption agreement if the amounts owing to them are paid in full by December 31, 2005. The Offering Memorandum described the background of the redemption and standstill and subsequent letter agreements and explained that the proceeds of the Senior Note issuance would be used in part to fund the redemption obligations of Monroe to the Papases and Gatzaroses: “Additionally, certain proceeds of this offering will be distributed to Kewadin Greektown and Monroe LLC to pay the installment amounts owing to” the Papas and Gatzaros Defendants. (ECF No. 13, PgID 2140.)

         The Offering Memorandum described the “Use of Proceeds” in part as follows: “Concurrently with the closing of the offering of the notes, we [Holdings] will dividend certain of these proceeds to Kewadin Greektown and Monroe LLC, which will use the funds to pay [Papas and Gatzaros].” (ECF No. 13, PgID 2163.) Also on November 22, 2005, Holdings, Merrill Lynch and MLPFS entered into a Note Purchase Agreement for the purchase of $165, 500, 000 of the Senior Notes (the “NPA”), which bound the initial purchasers of the Senior Notes to its terms. (ECF No. 13, PgID 2299-2329.) In the NPA, Holdings covenants that “[it] will use the net proceeds received by it from the sale of the securities in the manner specified in the Offering Memorandum under “Use of Proceeds.” (ECF No. 13, PgID 2310, § 3(g).)

         On December 1, 2005, the Papas and Gatzaros Defendants each entered into separate letter agreements with Kewadin, Monroe, the Tribe and the Kewadin Gaming Authority, acknowledging that the $155 million in transfers they expected to be paid to them from the proceeds of the sale of the Senior Notes by Holdings would be in satisfaction of the amounts then owed to them under the Redemption Agreements and amendments. (ECF No. 5, PgID 563-73, 575-77.) (“The 2005 Letter Agreements”). Both of the 2005 Letter Agreements required the payments under those Agreements to be made on or before December 2, 2005.

         On December 2, 2005, in a series of “simultaneously occurring” transactions, Holdings and Holdings II borrowed $190, 000, 000 through a new secured credit facility and issued the Senior Notes in the principal amount of $185, 000, 000. (ECF No. 5, PgID 120; ECF No. 13, Offering Memorandum, PgID 2140, 2163.) Holdings used the funds raised through the secured credit facility to contribute $190, 000, 000 to Greektown Casino to repay its then existing credit facility, (ECF No. 13, PgID 2140, 2163 & 2332-35), and declared a dividend of the remainder of the money (the proceeds of the Note sale) to its owners, Monroe and Kewadin. (ECF No. 13, PgID 2163) (“Concurrently with the closing of the offering of the notes, we will dividend certain of these proceeds to Kewadin Greektown and Monroe LLC, which will use the funds to pay former members of Monroe LLC.”). More specifically, Holdings received $190, 000 pursuant to the new credit agreement and $182, 582, 562 in aggregate proceeds pursuant to the NPA. (ECF No. 13, Flow of Funds Memorandum, PgID 2332, 2330-39.)[4] Holdings used the funds received pursuant to the NPA to transfer $110, 232, 634.07 and $34, 255, 960.03 to Kewadin and Kewadin used these proceeds in part to pay Monroe “pursuant to the terms of the Papas and Gatzaros Agreements.” (ECF No. 13, PgID 2333-34.) Monroe used those funds to pay the Papas and Gatzaros Defendants pursuant to the Letter Agreements. (ECF No. 13, PgID 2334.) The parties acknowledged, in the Flow of Funds Memorandum, “that for the sake of efficiency, the following actual net transfers were made, ” by Holdings through their bank account at MLPFS: (1) $90, 491, 741.62 to the Papases (the Papas Wire Transfer”); (2) $55, 000, 000 to the Gatzaroses (“the Gatzaros Wire Transfer”). (ECF No. 13, PgID 2337.)

         II. JURISDICTION AND STANDARD OF REVIEW

         The parties submit that this Court has jurisdiction, under 28 U.S.C. § 158(a)(1), to entertain the Litigation Trustee's appeal of Judge Shapero's November 24, 2015 Summary Judgment ruling and December 23, 2015 Order dismissing the Papas and Gatzaros Defendants from this Adversary Proceeding.[5] Under 28 U.S.C. § 158(a)(1), this Court has jurisdiction to hear appeals “from final judgments, orders, and decrees” issued by the Bankruptcy Court. In his December 23, 2015 Order of Dismissal, Judge Shapero certified his Dismissal Order as final pursuant to Fed.R.Civ.P. 54(b) and Fed. R. Bankr. Pro. 7054. (Bankr. Adv. Pro.10-05712, ECF No. 706, Order of Dismissal With Prejudice of Defendants Dimitrios (“Jim”) Papas, Viola Papas, Ted Gatzaros and Maria Gatzaros Pursuant to Their Motion For Summary Judgment Under 11 U.S.C. § 546(e).)

         III. ANALYSIS

         The Litigation Trustee, as the representative of the Original Noteholders and successors in interest to the holders of the Senior Notes, is seeking to recover the proceeds of the NPA that were wire transferred by MLPFS to the bank accounts of the Papas and Gatzaros Defendants. The Papas and Gatzaros Defendants assert, and the Bankruptcy Court found, that the Wire Transfers are protected from ...


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