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Lurgi, Inc. v. Northeast Biofuels

April 2, 2009

LURGI, INC., PLAINTIFF,
v.
NORTHEAST BIOFUELS, LP; BNP PARIBAS; AND WILMINGTON TRUST, FSB; DEFENDANTS.



The opinion of the court was delivered by: Hon. Glenn T. Suddaby, United States District Judge

DECISION and ORDER

Currently before the Court is a motion by Plaintiff Lurgi, Inc. ("Lurgi"), pursuant to Fed. R. Bankr. P. 7062 and 8005, for a stay (pending an appeal to this Court) of the March 21, 2009, Memorandum-Decision and Order of the Bankruptcy Court, which denied Lurgi's motion for a temporary restraining order and other injunctive relief. (Dkt. No. 5.) For the reasons set forth below, Plaintiff's motion for a stay is denied in part, and granted in part.

I. RELEVANT BACKGROUND

A. Factual History Giving Rise to Current Action

On June 29, 2006, Defendant Northeast Biofuels, LP ("NEB"), an ethanol manufacturer, entered into an Engineering, Procurement, Construction ("EPC") Agreement with Lurgi, a construction company. Article 3.3(c) of the EPC Agreement requires Lurgi to give NEB a standby Letter of Credit ("LOC") in the event that Lurgi chooses not to permit NEB to retain any progress payments, and gives NEB the right to present, and draw down on, that LOC only if Lurgi "breached its obligations under [the] [EPC] Agreement" and only in "the amount then due to [NEB]." In addition, when read together, Articles 3.6 and 18.2 of the EPC Agreement require that, if a dispute arising from the EPC Agreement is not resolved by agreement of the parties, then the dispute must be submitted to arbitration. Article 18.4 provides that the arbitration tribunal--whose decision shall be final and binding on the parties--shall determine any award of damages.

On October 12, 2007, Lurgi gave NEB the LOC issued by BNP Paribas (a private bank) in the amount of $3 million. Subsequently, the LOC was amended (and increased) four times (on November 13, 2007, February 4, 2008, March 19, 2008, and November 14, 2008), until it reached the amount of $8,111,994.69. Meanwhile, to help finance the construction of the ethanol plant, NEB took out a secured loan from Harris, NA (a private bank). As security, NEB granted Harris, NA a first-security interest in NEB's right, title and interest in all personal property of NEB, which apparently included all accounts, monies, and letter-of-credit rights.*fn1

The target completion date of the plant was January 2008. However, by August 2008, the plant was not yet complete, and could operate at only seventy-five percent (75%) of the targeted production rate. On approximately August 24, 2008, NEB assumed operational control of the plant. On October 13, 2008, Lurgi sent NEB a letter regarding what it described as "continuing serious problems Lurgi and NEB are encountering at the plant." In the letter, Lurgi provided examples of what it believed to be NEB's "operational issues that are causing system failures." Three days later, Lurgi sent NEB Contract Change Order ("CCO") No. 049, which sought to add forty-four and one-half (44.5) calendar days to Lurgi's performance period, and requested payment of an additional amount, later claimed to be $22 million. Attached to this CCO was an eight-page, day-to-day summary of NEB's (alleged) deficiencies. NEB did not sign this CCO.

Instead, on December 8, 2008, NEB served Lurgi with a two-page Notice of Default under the EPC Agreement, briefly listing Lurgi's nine (alleged) failures. Lurgi responded by serving an arbitration demand, and filing a mechanics' lien against the project in the amount of $22 million. NEB responded to the arbitration demand, and asserted claims of $65 million against Lurgi.

On January 15, 2009, NEB filed for bankruptcy under Chapter 11 (reorganization). NEB has been unable to obtain outside sources of financing to complete construction of the project. As a result, NEB intends to sell the facility at public auction, to be held on April 29, 2009.

B. Procedural History Giving Rise to Current Action

On March 5, 2009, Lurgi filed an adversary proceeding in Bankruptcy Court, requesting (1) a temporary restraining order and preliminary injunction to prevent NEB from presenting the LOC to Paribas, or (2) in the event that the Court allows NEB to draw down on the LOC, that the Court provide one of three forms of alternative relief: (a) an Order requiring that the funds be segregated and escrowed in an account that is not held by Wilmington Trust, and that Wilmington Trust's security interest not attach to the funds without further Order of the Court;

(b) an Order granting Lurgi a claim for a super-majority unsecured administrative expense pursuant to 11 U.S.C. § 364(c) in the cumulative amount of the draw-downs; or (c) an Order granting Lurgi a claim for an administrative expense pursuant to 11 U.S.C. § 503 in the cumulative amount of the draw-downs. Subsequently, NEB voluntarily agreed not to present the LOC to Paribas until the Bankruptcy Court held a hearing and issued its decision on Lurgi's motion.

On March 16, 2009, the Bankruptcy Court held a hearing on Lurgi's motion. On March 21, 2009, the Bankruptcy Court issued a Memorandum-Decision and Order denying Plaintiff's motion. Generally, in its decision, the Bankruptcy Court found that letter-of-credit law governs Lurgi's request for a preliminary injunction preventing a draw-down on the LOC. As a result, the Bankruptcy Court concluded that Lurgi (1) "failed to carry its burden of demonstrating that it is likely to prevail on the issue of whether the Debtor's right to draw down on the [LOC] is subject to arbitration, nor on any fraud claim, which it failed to specifically allege," and (2) "failed to demonstrate in the balance of any respective hardships that it would be more greatly harmed than would the insolvent Debtor in this chapter 11 case." See Lurgi, Inc. v. Northeast Biofuels, No. 09-50012-mcr, Memorandum-Decision and Order, at 8-9 (Bankr. N.D.N.Y. filed March 21, 2009) (Cangilos-Ruiz, J.).

In addition, the Bankruptcy Court denied Lurgi's three alternative forms of relief sought. Specifically, it concluded that (1) an Order requiring NEB to segregate and escrow the LOC proceeds would be improper because "the same letter of credit principles apply regardless of whether an applicant attempts to prevent a draw down directly through an injunction or indirectly though 'similar relief' such as attachment," (2) an Order declaring that the security interest of Wilmington Trust does not attach to the LOC proceeds would be improper given Wilmington Trust's valid state contract rights, and (3) an Order granting Lurgi either a super-majority unsecured administrative expense claim pursuant to 11 U.S.C. § 364, or an administrative expense claim pursuant to 11 U.S.C. § 503, would be unsupported by law. Id. at 9-10.

On March 23, 2009, Lurgi filed the current action, seeking a stay of the Bankruptcy Court's Memorandum-Decision and Order of March 21, 2009. That same day, the District Court denied Lurgi's request and directed Lurgi to first present its request to the Bankruptcy Court. Later that day, Lurgi did so.

On March 24, 2009, the Bankruptcy Court denied Lurgi's motion for a stay. Generally, in its decision, the Bankruptcy Court found as follows: (1) Lurgi would not be irreparably harmed if the stay is denied because Lurgi is "getting the benefit of the bargain it struck," and "if Lurgi is later, as a result of arbitration, found to have a claim against the Debtor, it will be treated equally with all other claims in accordance with the priorities set forth in the Bankruptcy Code"; (2) Lurgi failed to demonstrate that the harm it would suffer if the stay is denied outweighs the harm NEB would suffer if the stay is granted because the NEB is almost depleted of funds, and has ongoing expenses that it must pay "to encourage the best [facility sale] price possible for the benefit of all creditors . . ."; (3) Lurgi failed to demonstrate a substantial possibility of success on appeal because although "the parties' rights under the EPC Agreement are subject to arbitration[,]" letter of credit law applies to whether NEB may draw on the LOC, and Lurgi has not sufficiently plead fraud; and (4) Lurgi failed to demonstrate that a stay would serve the public interest because "denial of the stay will permit the sale to proceed." See Lurgi, Inc. v. Northeast Biofuels, No. 09-50012-mcr, Order Denying Stay Pending Appeal, at 3-6 (Bankr. N.D.N.Y. filed March 24, 2009) (Cangilos-Ruiz, J.). Having unsuccessfully presented its request for a stay to the Bankruptcy Court, Lurgi refiled its motion for a stay with this Court.

Later that day on March 24, 2009, Chief United States District Judge Norman A. Mordue issued an Order granting Lurgi's motion for a stay. Specifically, the Order stated that, "until further Order of this Court, [NEB] is hereby enjoined and/or restrained from drawing down on the Letter of Credit; and . . . that[,] until further Order of this Court, defendants are enjoined from taking any action that would diminish or impair the relief requested herein, including but not limited to presenting and/or honoring any draw certificates under the Letter of Credit." (Dkt. No. 7 at 2.)

On March 25, 2009, Chief Judge Mordue reassigned this action to the undersigned for disposition. That same day, the undersigned scheduled Lurgi's motion for a hearing, which was held on March 30, 2009. In attendance at the hearing were counsel for Plaintiff and Defendants, counsel for Wilmington Trust, and counsel for the Official Committee of Unsecured Creditors. At the conclusion of the hearing, the undersigned reserved decision and stated that Chief Judge Mordue's ...


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