U.S. ex rel. Taxpayers Against Fraud v. Singer Co.
| Decision Date | 22 November 1989 |
| Docket Number | 89-2417 and 89-2418,Nos. 89-2396,CAE-L,s. 89-2396 |
| Citation | 889 F.2d 1327 |
| Parties | 35 Cont.Cas.Fed. (CCH) 75,751 UNITED STATES of America, ex rel; TAXPAYERS AGAINST FRAUD; Christopher Urda, Plaintiffs-Appellees, v. The SINGER COMPANY, Defendant-Appellant, Link Flight Simulation Corporation;ink Corporation, Defendants-Appellees. UNITED STATES of America, ex rel; TAXPAYERS AGAINST FRAUD; Christopher Urda, Plaintiffs-Appellees, v. The SINGER COMPANY, Defendant-Appellant, Link Flight Simulation Corporation;ink Corporation, Mesa Holdings Limited Partnership, Defendants-Appellees. UNITED STATES of America, ex rel; TAXPAYERS AGAINST FRAUD; Christopher Urda, Plaintiffs-Appellees, v. MESA HOLDINGS LIMITED PARTNERSHIP, Defendant-Appellant, Link Flight Simulation Corporation;ink Corporation, the Singer Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Morton M. Maneker (Charles S. Sims, Thomas C. Moore, Proskauer Rose Goetz & Mendelsohn, New York City, on brief), Keith P. Ellison (Baker & Botts, Houston, Tex., William Alden McDaniel, Jr., Murphy & McDaniel, Baltimore, Md., on brief), for defendant-appellant.
Steven D. Aitken (Stuart E. Schiffer, Acting Asst. Atty. Gen., Breckinridge L. Willcox, U.S. Atty., Joyce R. Branda, Michael B. Suessmann, Attys., Civ. Div., Dept. of Justice, Robert E. Montgomery, Jr., Leslie G. Fagen, Derick P. Berlage, Erika A. Kelton, John R. Phillips, Paul, Weiss, Rifkind, Wharton & Garrison, Washington, D.C., John E. Hoffman, Jr., Carole L. Fern, Lorraine K. Rak, John P. Biederman, Shearman & Sterling, New York City, Stephen J. Immelt, Piper and Marbury, Baltimore, Md., on brief) for plaintiffs-appellees.
Before MURNAGHAN, SPROUSE and CHAPMAN, Circuit Judges.
The Singer Company has been the subject of a recent highly leveraged buy out. There has also been initiated a qui tam complaint against Singer. The United States, claiming $77,000,000 under the False Claims Act, 31 U.S.C. Sec. 3729, which may be trebled (i.e., $231,000,000) and also may be increased upon further investigation of the facts by the government, sought and obtained a preliminary injunction from the United States District Court for the District of Maryland, Judge Herbert F. Murray presiding, on May 25, 1989. 1
The preliminary injunction required Singer to obtain court review and approval of non-ordinary-course-of-business transactions to prevent Singer, without court awareness, from further liquidating or distributing its assets.
The appeal was expedited by order of June 14, 1989. 2 In addition, both Singer and Mesa Holdings Limited Partnership ("Mesa") 3 appeal from an order issued on June 30, 1989, which denied Singer's motion, filed May 30, 1989, in the district court asking it to review and approve three transactions. Singer sought approval (1) of a payment of $81 million, plus accrued interest, to Mesa and Shearson Lehman Brothers Holdings, Inc. ("Shearson"); 4 (2) of a payment of quarterly dividends when they were due to ripen on its $3.50 cumulative preferred stock; and (3) of a sale of its SimuFlite division to any person unrelated to Singer on such terms as the Singer Board of Directors should determine to be reasonable.
On June 28, 1989, the court held a hearing on Singer's motion seeking such approval, at which time Mesa's motion to intervene was granted. On June 30, 1989, the court denied Singer's motion for approval and, on July 11, 1989, set forth its reasons. Singer and Mesa filed notices of The preliminary injunction was granted in connection with an ongoing lawsuit of the United States against Singer, Link Flight Simulation Corp. ("Link Flight"), 6 and CAE-Link Corp. ("CAE-Link"). In its first amended complaint filed on March 14, 1989, following the unsealing of the qui tam complaint brought by two relators, the United States alleged that Link Flight had engaged in a long-term scheme between 1980 and 1988 to defraud the government in the negotiation of sole-source, fixed price contracts with the Department of Defense. 7 Link Flight failed to disclose certain contingency costs designed to offset price reductions expected to occur during negotiations with the government, in violation of its obligation to bid its "best estimate" of the costs to perform the contract. 8 See 48 C.F.R. Sec. 15.804-6 (1988). Two former Link Flight employees stated that the purpose of the hidden reserves--referred to internally as the "negotiation loss" or "management reserve"--was to offset the anticipated price reductions that would occur during negotiations with the government's contracting officials.
appeal on June 30, 1989 and July 5, 1989, respectively, and the appeals were consolidated with the appeal of the preliminary injunction. 5
The government seeks, inter alia, treble damages pursuant to the False Claims Act, 31 U.S.C. Secs. 3729 et seq., totaling at least $231 million. The damages are based on documents obtained from Link Flight which show a total of $77 million in undisclosed negotiation loss reserves. 9
The government moved for a preliminary injunction when it became concerned that Singer, which had been successfully targeted for a leveraged buyout, 10 was quickly liquidating its divisions to pay off the acquisition debt incurred in connection with the takeover. Before the takeover in early 1988, Singer had assets of approximately $1.58 billion and shareholders' equity of $633 million (as of December 31, 1987). About a year later, following the takeover and divestiture of a majority (9) of its divisions (including Link Flight), Singer's assets had decreased to $445 million and its shareholders' equity had fallen to $80 million.
The government requested the preliminary injunction because more divestiture In September of 1988, Bilzerian, on behalf of Singer, called for the repurchase of the Class B and Class C common stock. Disagreement arose as to the valuation of the takeover profits. As settlement, Mesa agreed to take $20.4 million and Shearson $9.6 million. 12 The agreement also permitted Mesa to take control of Singer's board of directors if the redemption of Mesa's stock did not occur before July 1, 1989. 13
was planned and not all of the acquisition debt had been repaid. 11
The district court's memorandum dated May 24, 1989, which was adopted on the following day as the court's reasoning for its grant of the preliminary injunction, carefully addressed the issue of its power to issue the preliminary injunction. In sum, it concluded that the Supreme Court case relied on by Singer, De Beers Mines v. United States, 325 U.S. 212, 65 S.Ct. 1130, 89 L.Ed. 1566 (1945), was distinguishable and that the situation presented here was more closely aligned with those described in Deckert v. Independence Shares Corp., 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189 (1940), and United States v. First National City Bank, 379 U.S. 378, 85 S.Ct. 528, 13 L.Ed.2d 365 (1965). 14
Judge Murray's application of the general principles as explained in his memorandum is far from flawed. Preliminary injunctions are permitted in situations such as the one presented here where the plaintiff alleged that the principal defendant was "insolvent and threatened with many law suits, that its business [was] virtually at a standstill because of unfavorable publicity, that preferences to creditors [were] probable, and that its assets [were] in danger of dissipation and depletion." Deckert, 311 U.S. at 285, 61 S.Ct. at 232. 15
Moreover, Singer's assertion that the district court erred in finding a realistic threat of insolvency fails in view of the clearly erroneous standard of review and the evidence substantially supporting those findings. The district court did not err in considering the ad damnum demands in other suits in assessing the threat of insolvency. See Deckert, 311 U.S. at 285, 61 S.Ct. at 231; cf. Tri-Continental Leasing Corp., Inc. v. Zimmerman, 485 F.Supp. 495, 499-500 (N.D.Cal.1980) (). Consequently, it was appropriate to consider that Singer had potential liability of $235 million, excluding punitives, as defendant of several pending lawsuits.
Singer has also criticized the district court's finding that Singer "is for all practical purposes in the process of an orderly liquidation." Singer contends that the newspaper article cited for the district court's conclusion is insufficient and that the record evidence is to the contrary. It is true that some liquidation typically follows many hostile takeovers and that Singer may have announced the completion of its divestiture program on October 3, 1988. Singer, however, ignores other evidence in the record which supports the district court's conclusion that Singer had not completed its distribution of assets.
First, Singer had represented that an injunction would not be necessary because it did not intend to reduce further its capital and then, four days later, Singer re-purchased $30 million worth of stock from its shareholders. It has also attempted to sell its SimuFlite Division and on July 10, 1989, with court approval, did sell a Canadian subsidiary, Singer Company of Canada, Ltd. Given that Singer's assets dropped from $1.58 billion to less than $450 million after the takeover and its equity similarly fell from $445 million to $80 million, that its current liabilities ($270.6 million) for the quarter ending March 31, 1989 exceed its current assets ($235.3 million) and that Singer's net income for the same period was only $1.1 million, it was not unreasonable for the district court to conclude that "[i]n these unique circumstances, it is probable that in the absence of an injunction Singer would have no assets left to satisfy a judgment in this case, irreparably...
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