CT of Virginia, Inc. v. Euroshoe Associates

Citation762 F. Supp. 675
Decision Date22 April 1991
Docket NumberCiv. A. No. 90-0043-L.
PartiesC-T OF VIRGINIA, INC., f/k/a Craddock-Terry Shoe Corporation, Plaintiff, v. EUROSHOE ASSOCIATES LIMITED PARTNERSHIP, et al., Defendants.
CourtU.S. District Court — Western District of Virginia

Edward B. Lowry, Michie, Hamlett, Lowry, Rasmussen & Tweel, P.C., Charlottesville, Va., and Harold Bonacquist, Paul Traub, Fredrick J. Levy, Traub, Bonacquist, Yellen & Fox, New York City, for C-T of Virginia, Inc.

David D. Embrey, Cunningham & Embrey, Lynchburg, Va., for Edgar T. and Georgia K. Harris, Mary M. Hunt, Edgar L. and Vera B. Dehner Living Trust, Vera B. Dehner, Jonathan D. Dehner Co., Wood W. Lay.

Carter R. Allen, Allen & Carwile, Waynesboro, Va., for Ruth B. Cohn and Dorothy L. Mondell.

C. Burton Gerhardt, pro se.

W. Martin Johnson, pro se.

James J. Sakolosky, Davidson, Sakolosky & Richards, P.C., Lynchburg, Va., for Schewel Furniture Co.

Carter R. Allen, Allen & Carwile, Waynesboro, Va., and Ned L. Fisher, Hall, Holmberg, Roach, Johnston & Fisher, Waukegan, Ill. for Ruth B. Cohn and Dorothy L. Mondell.

Richard E.B. Foster, Magee, Foster, Goldstein & Sayers, Roanoke, Va., for Harold and Karl D. Walls.

Alexander W. Bell, Lynchburg, Va., and Thomas E. Palmer, Squire, Sanders & Dempsey, Columbus, Ohio, for Euroshoe Associates Ltd. Partnership, and N.V. Euro Shoe Unie.

Benjamin C. Ackerly, Virginia W. Powell, Tyler P. Brown, Hunton & Williams, Richmond, Va., for Michael J. Gade, Lewis B. Goode, Jr., Edward F. Haley, III, W. Edwin Masencup, Jr., G. Bruce Miller, Roland K. Peters, Elias Richards, III, Kenneth S. White, and Alan L. Wurtzel.

Mitchell A. Karlan, Stephen A. Kaplan, James P. Ricciardi, Stuart D. Karle, Gibson, Dunn & Cruthcer, New York City, and W. Stephen Scott, Paxson, Smith, Gilliam & Scott, Charlottesville, Va., and Edward Lee Isler, Terence P. Ross, Gibson, Dunn & Crutcher, Washington, D.C., pro hac vice, for Hecco Ventures, Cinerama, Inc. James J. Cotter Ltd., and Michael R. Foreman.

John G. Douglass, Wright, Robinson, McCammon, Osthimer & Tatum, Richmond, Va., for Louise, Margot, Mary G., and Samuel B. Aronson, The Fisher Trust and Kenneth L. and Sherilynn A. Fisher.

MEMORANDUM OPINION

KISER, District Judge.

This matter is before me on motions for summary judgment and motions to dismiss filed by several different groups of defendants. The plaintiff in this action is a large corporation now in bankruptcy. The defendants are former shareholders of the plaintiff who sold their shares to the company as part of a leveraged buyout that converted Craddock-Terry into a closely held corporation. Plaintiff contends that the transaction through which Craddock-Terry purchased its own shares was a voluntary transfer that unjustly enriched the defendants.

Facts

The facts underlying this case are essentially undisputed. In April 1985, C-T hired Prudential-Bache Securities, Inc., as financial advisor to study strategic financial alternatives available to C-T. One of Prudential's recommendations was that C-T pursue a leveraged buyout. The Board decided that a management buyout would most likely realize maximum value for shareholders because it (i) would provide the highest expected value to shareholders and had a high probability of success, (ii) would maintain the viability of the enterprise, and (iii) would protect the interests of employees and other constituents. The Board authorized management to explore a buyout at a price of $15 per share.

On June 12, 1985, after an announcement of a proposed LBO by management, C-T received an unsolicited proposal from Southwestern General Corporation proposing a merger under which holders of C-T would receive $17.50 per share. Southwestern withdrew its offer on August 26, 1985, following an announcement by President Reagan that he would not limit the importation of shoes into the United States.

On November 11, 1985, HH Holdings, Inc., a Delaware holding company, made an unsolicited offer for a cash merger in which each share of C-T common stock would be exchanged for $19.00 cash. On November 25, 1985, HH Holdings increased its offer to $20.00 cash per share of C-T common stock (the "merger consideration"). C-T's Board of Directors found the terms acceptable, and the parties agreed to a "reverse triangular merger." HH Holdings formed a wholly owned subsidiary, HH Acquisition, Inc., for the purpose of completing the merger. An Agreement in Principle was signed on December 11, 1985, and an Agreement and Plan of Merger was executed on January 24, 1986, between C-T, HH Holdings and HH Acquisition. The Merger Agreement provided that on April 30, 1986, HH Acquisition would merge into C-T, with C-T as the surviving corporation owned by HH Holdings.

The buyout was consummated on scheduled on April 30. C-T deposited approximately $27 million into an escrow account held at Sovran Bank.1 Shareholders were required to tender their shares to the escrow agent, which provided them with $20 per share and then extinguished the shares. Because all of the pre-existing C-T shares were extinguished, HH Holdings, as owner of HH Acquisition, owned 100% of C-T. C-T borrowed about $27 million of the $31 million it placed with the escrow agent.

After the buyout, C-T was unable to maintain a strong financial position. Evidence submitted in other cases conflicts as to whether C-T was unable to pay its bills on a timely basis immediately after the merger, but before long C-T sank into insolvency. C-T filed for bankruptcy on October 21, 1987, and has not yet filed a plan for reorganization.

Legal Action

On July 10, 1990, C-T filed this suit against 45 of its shareholders, who received amounts ranging between $6,000 and $6,140,000 each in the leveraged buyout in exchange for their shares. Some of the shareholders were members of C-T's Board of Directors, but most were not insiders. The defendants include trusts, limited and general partnerships, and corporations as well as natural persons.

C-T seeks to void the transfers of money from itself to the former shareholders. It argues that the transfers are voidable under Virginia law because they were not made for "consideration deemed valuable at law." Va.Code § 55-81. C-T also asserts that the transfers unjustly enriched the shareholders at the expense of creditors of C-T's creditors. In addition to return of money, C-T seeks attorney fees and a declaratory judgment disallowing or subordinating the claims the defendants might make against it.

Two defendants, Cede, Inc. and Bartlett & Co., were dismissed from the suit because they were not the beneficial owners of stock registered in their names.2 All of the remaining defendants have submitted briefs requesting either summary judgment or dismissal of the suit, and all have had an opportunity to participate in oral argument. I shall construe pending motions to dismiss as motions for summary judgment. The grounds for granting summary judgment apply equally to all defendants.

In another action, C-T sued the members of the Board of Directors who approved the merger. C-T asserted that by approving a merger that would leave the company saddled with debt, the directors violated a fiduciary duty to the company's creditors, and also authorized an illegal distribution to shareholders for which they could be held personally liable under Virginia law. I dismissed the counts alleging breach of fiduciary duty, and later granted summary on the illegal distribution count. C-T, Inc. v. Barrett, 124 B.R. 689 (W.D.Va.1990) (fiduciary duty); C-T, Inc. v. Barrett, 124 B.R. 694 (W.D.Va.1990) (distribution). In the summary judgment ruling, I found that the merger transaction was not a distribution. C-T's appeal of that ruling is now pending with the fourth circuit.

Analysis

Defendants have presented several alternative arguments in favor of summary judgment. I need consider only one in order to dispose of this case. Both the voluntary conveyance and the unjust enrichment theories advanced by the plaintiff require it to establish that it received no "consideration deemed valuable at law" in return for the payment for the stock. The plaintiff has not presented any facts that would tend to support this claim, nor has it provided any credible suggestion that further discovery would enable it to make this case.

Under Va.Code § 55-81, a gift is void to creditors if it is "not upon consideration deemed valuable in law." The Virginia Supreme Court has not defined this phrase in a commercial context, but all of the cases focus on whether a transaction involved any valuable consideration at all, and not on the balance sheet test appropriate in actions to avoid preferential payments brought under 11 U.S.C. § 548(a)(2).3 See Inspiration Coal, Inc. v. Mullins, 690 F.Supp. 1502, 1506 (W.D.Va.1988). My ruling in C-T, Inc. v. PaineWebber, Inc., 124 B.R. 700 (W.D.Va.1990) is not to the contrary; there, I suggested that cases decided under "less than a reasonably equivalent value" standard under the Bankruptcy Code, 11 U.S.C. § 548(a)(2)(A) provide guidance for deciding whether C-T's payment of a debt owed by HH Holdings was a voluntary conveyance under Virginia law. I concluded that C-T had received no valuable consideration at all. It was not necessary to consider the issue presented here: If C-T had received some consideration, would the transaction have to meet a balance sheet standard of fairness to survive a challenge as a voluntary conveyance? As Judge Williams found in Inspiration Coal, the Virginia Supreme Court has never established such a requirement and has hinted that no requirement exists. In this case, it is clear that C-T received some "consideration deemed valuable at law," and I shall not inquire further.

The merger has the appearance of a legitimate, arm's length business transaction: the defendants received money, and HH Holdings received control of C-T. C-T provided the defendants with cash, and received an investment of...

To continue reading

Request your trial
12 cases
  • In re Wellington Apartment, LLC, Bankruptcy No. 04-50301-DHA.
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
    • August 24, 2006
    ...Supreme Court, but has been interpreted by the Fourth Circuit to mean that something of value must be gained. C-T of Virginia v. Euroshoe Associates, 762 F.Supp. 675 (W.D.Va.1991), aff'd, 953 F.2d 637 (4th Cir. 1992) (table decision) [hereinafter C-T 1]. That court explicitly found that the......
  • Arrowsmith v. Lemberg Law, LLC (In re Health Diagnostics Lab., Inc.)
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
    • March 30, 2017
    ...Va. May 19, 2014) (quoting In re James River Coal Co., 360 B.R. 139, 167 (Bankr. E.D. Va.2007) (quoting C–T of Virginia , Inc. v. Euroshoe Associates, 762 F.Supp. 675 (W.D. Va. 1991), aff'd, 953 F.2d 637 (4th Cir. 1992) )).Washington, Oklahoma, and Pennsylvania have all adopted the Uniform ......
  • In re James River Coal Co.
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
    • February 8, 2007
    ...Supreme Court, but has been interpreted by the Fourth Circuit to mean that something of value must be gained. C-T of Virginia v. Euroshoe Associates, 762 F.Supp. 675 (W.D.Va.1991), aff'd, 953 F.2d 637 (4th Cir.1992) (table decision) [hereinafter C-T 1]. That court explicitly found that the ......
  • In re Carr & Porter, LLC, Bankruptcy No. 07-70238-SCS.
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
    • March 17, 2009
    ...Supreme Court, but has been interpreted by the Fourth Circuit to mean that something of value must be gained. C-T of Virginia v. Euroshoe Associates, 762 F.Supp. 675 (W.D.Va. 1991), aff'd, 953 F.2d 637 (4th Cir. 1992) (table decision) [hereinafter 1], That court explicitly found that the co......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT