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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.

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