'Gulf Fleet' a Lexicon for Sponsors, Affiliate Transfers and Failed LBOs

Litigation over affiliate transactions arising in failed portfolio companies continues to provide guidance on core common issues such as breach of fiduciary duties, avoidance actions, equitable subordination and recharacterization. A recent bankruptcy case in the Western District of Louisiana illustrates how at least one court will analyze allegations regarding affiliate transactions in the context of a motion to dismiss a recovery action based on a failed leverage buyout (LBO).¹ While the decision may be preliminary because the court, in granting the motion to dismiss, also permitted the plaintiffs to replead, it is nevertheless significant in its approach to choice of law, the internal affairs doctrine and the trend to limit reliance upon the general equitable powers of the bankruptcy court under §105. In addition, the case once again confirms that plaintiffs must meet the demands of the U.S. Supreme Court cases Twombly² and Iqbar,³ which have rendered “bare bones” pleadings in federal courts ineffective, requiring instead that a cause of action be pled with sufficient facts as to be plausible on its face. Despite the presence of a management contract, affiliate loans, and converting unsecured debt into secured debt, Gulf Fleet can be seen as a cautionary reminder that failure of a portfolio company without more does not merit recovery from the sponsors.

Background

Formed in 1999 by Michael and Darlene Hillman, Gulf Fleet Holdings and its 10 subsidiaries (Gulf Fleet or the debtors) owned and operated approximately 18 vessels that worked in the offshore oil and gas industry, primarily in the Gulf of Mexico. In 2007, the Hillmans entered into a leveraged buyout transaction with private investment firm H.I.G. Capital, selling their equity stake in Gulf Fleet to H.I.G. for $23.5 million. Michael Hillman retained 35 percent of the acquisition vehicle formed as an H.I.G. subsidiary and remained on the Gulf Fleet board. Through the subsidiary, however, H.I.G. controlled Gulf Fleet with a 65 percent interest. The LBO was funded by a $42 million syndicated loan led by Comerica Bank, which was secured by Gulf Fleet’s property, as well as certain other debt instruments.