Hedge funds ordered to pay private equity firm TPG more than USD500,000
TPG, one of the world’s largest private equity firms, has been awarded over USD500,000 in sanctions against three hedge funds who had been pursuing unsuccessful involuntary bankruptcy petitions against two former TPG related companies.
A New York Bankruptcy Court granted the award last week (18 July 2013).
Law firm Kasowitz Benson Torres & Friedman represented TPG as the three hedge funds pursued the firm in courts around the world for the past three years. The team included Andrew K Glenn, Paul M O’Connor III, and Michele L Angell.
Stamell & Schager represented the three hedge funds, referred to as the “petitioning creditors”.
The nub of the issue relates to Hellas, a Greek telecoms company that two TPG entities owned a portion of. The entities in question were TPG Troy and T3 Troy. Luxembourg subsidiaries of Hellas issued a series of PIK notes and Sub Notes which ended up defaulting in late 2009: approximately two and a half years after the Troy Entities had sold their interest in Hellas, and some three years after the notes had first been issued.
The plaintiffs and noteholders of Hellas claimed to have incurred USD1bn in losses as a result of the default. The petitioning creditors alleged that Hellas was left insolvent in early 2007 when TPG and its investment partner APAX, a London-based private equity group, sold its interests.
Judge Martin Glenn dismissed the involuntary petitions and awarded USD513,000 in attorneys’ fees and costs but denied request for punitive damages.
“The petitioning creditors should not be able to wage their global war without consequences,” said Judge Glenn.
On 21 December 2012, the petitioning creditors filed involuntary petitions against the Troy entities at SDNY bankruptcy court. The involuntary cases were based on prior lawsuits using virtually identical complaints in jurisdictions spanning from New York to Delaware to California to Luxembourg.
Over the last three years, this has resulted in 12 lawsuits, of which six are still pending. Indeed, on the same day that Judge Glenn dismissed the two petitions, Deutsche Bank, who were also entangled in the Hellas note default, had their case dismissed by Judge Oetken at SDNY district court.
The prior lawsuits alleged losses incurred as a result of defaulted PIK Notes and Sub Notes issued by Luxembourg subsidiaries of Hellas. The Troy entities were two of eight entities that owned a portion of Hellas when the notes were issued by its subsidiaries.
In early 2007, TPG and APAX sold their interest in Hellas to a third party firm, Wind/Weather, for substantial value above the amount of Hellas’ debt.
Wind/Weather then ran the company all through the rest of 2007, 2008 and most of 2009 until the default event occurred. At that time, there were significant changes in the world economy. Greece, in particular, was imploding.
The resultant default occurred during this period of massive market instability, two and a half years after TPG had divested its interests.
Why the note holders chose to pursue TPG and not Wind/Weather remains unclear.
Kasowitz argued that there was no legal or factual merit to the claims and allegations that Hellas was left insolvent and moved to dismiss the involuntary petitions as having been improperly filed. The petitioning creditors were offered the chance to withdraw the petitions. If not, Kasowitz would seek sanctions upon dismissal.
On 9 Ma, 2013, SDNY bankruptcy court dismissed the two involuntary petitions for having been improperly filed pursuant to the bankruptcy rules. Judge Glenn closed the case, finding that petitioning creditors’ claims were subject to a bona fide dispute.
The real significance of this case is that not only does it dismiss the entire effort to misuse the bankruptcy process to pursue TPG, but also because the court took the step of awarding attorneys’ fees as a sanction in the process in the hope that it would stop any further improper filings.
In his ruling, Judge Glenn said that much of the work that was the subject of the request for attorneys’ fees arose out of conduct initiated by petitioning creditors. The Troy entities’ counsel had no choice “but to defend or respond to the various actions taken by petitioning creditors throughout this dispute”.
“The amount of attorneys’ fees and costs awarded by the Court in this case is very substantial and will hopefully serve as a deterrent to similar misconduct in the future. The aggressive litigation conduct by petitioning creditors’ counsel has substantially increased the attorneys’ fees and costs expended to defend the Troy Entities against the improperly filed involuntary petitions,” said Judge Glenn.
The size of the award is therefore reflective of the amount of work the Kasowitz team had to engage in.
Kasowitz is seeking to dismiss all other prior lawsuits that have been filed in different courts.
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