930 F.2d 1275 (7th Cir. 1991), 89-2431, Matter of EDC, Inc.

Docket Nº:89-2431.
Citation:930 F.2d 1275
Party Name:In the Matter of EDC, INCORPORATED, et al., Debtors-Appellants.
Case Date:May 01, 1991
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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930 F.2d 1275 (7th Cir. 1991)

In the Matter of EDC, INCORPORATED, et al., Debtors-Appellants.

No. 89-2431.

United States Court of Appeals, Seventh Circuit

May 1, 1991

Argued April 1, 1991.

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[Copyrighted Material Omitted]

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Philip S. Beck, Chaim T. Kiffel, David J. Zott, Donald G. Kempf, Jr., David M. Elston, Kirkland & Ellis, Robert W. Booth, Chicago, Ill., for International Harvester Co.

Ann M. Hamilton, Philip S. Beck, Chaim T. Kiffel, Donald G. Kempf, Jr., David M. Elston, Kirkland & Ellis, Chicago, Ill., for Navistar Intern. Transp. Corp.

Richard N. Golding, Lord, Bissell & Brook, Constantine L. Trela, Howard J. Trienens, Thomas W. Merrill, Jonathan K. Baum, Sidley & Austin, John P. Crowley, Matthew F. Kennelly, Cotsirilos, Stephenson, Tighe & Streicker, Lee A. Watson, Steven L. Bashwiner, C. Elizabeth McCarty, Mary Ellen Hennessy, Helen C. Lucas, Katten, Muchin & Zavis, Malcolm M. Gaynor, David P. Leibowitz, Schwartz, Cooper, Kolb & Gaynor, Thomas H. Geoghegan, Leon M. Despres, Despres, Schwartz & Geoghegan, Lawrence Fisher, Paul Homer, Friedman & Koven, Chicago, Ill., for debtors-appellants.

Leonard A. Grossman, Dept. of Labor, Chicago, Ill., Carol Connor Flowe, Israel Goldowitz, Melinda Tell Lazare, Pension Ben. Guar. Corp., Legal Dept., George R. Clark, William O. Bittman, Reed, Smith, Shaw & McClay, Washington, D.C., for Pension Ben. Guar. Corp. amicus curiae.

Before POSNER, FLAUM, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

Debtors in possession, representing the unsecured creditors of a group of bankrupt affiliated corporations (collectively, EDC), charge the International Harvester Company (now called Navistar) with mail and wire fraud, 18 U.S.C. Secs. 1341 and 1343, as predicate offenses under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1962, 1964. Damages in excess of $100 million before trebling are sought. The plaintiffs also seek to subordinate or extinguish tens of millions of dollars' worth of Harvester's claims against the bankrupt estate. After a bench trial, the district judge gave judgment for Harvester on all of EDC's claims.

We must of course construe the facts as favorably to the district judge's findings as the record permits, and when this is done the case does not reveal fraud. The story, much abbreviated, begins in the middle 1970s. International Harvester, then a major manufacturer of combines and other heavy farm equipment, as well as of trucks (its present business), owned, and was the principal customer of, a fully integrated steel manufacturer called Wisconsin Steel Company. Wisconsin Steel was not highly profitable, and Harvester decided to get rid of it. It wanted to divest itself of Wisconsin Steel's liabilities as well, which were liabilities of Harvester because Wisconsin Steel was not a subsidiary of Harvester but merely a division. Foremost among these liabilities were more than $86 million in vested pension benefits of Wisconsin Steel's workers. One choice for Harvester was simply to liquidate Wisconsin Steel, but then it would be stuck with the pension liability. Another choice was to find a buyer for the division. After discussions with the staff of the Pension Benefit Guaranty Corporation, which pursuant to the Employee Retirement Income Security Act (ERISA) guarantees vested pension rights,

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29 U.S.C. Secs. 1321 et seq.; Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 361 n. 1, 100 S.Ct. 1723, 1726 n. 1, 64 L.Ed.2d 354 (1980), Harvester decided that if it sold the division and the buyer survived for at least five years it probably would not be liable for any pension benefits even if the buyer could not pay them. This expectation made sale preferable to liquidation, or to a massive capital infusion designed to make the division profitable; so Harvester set about to find a buyer. At first it had no success at all. But eventually--after a sale to a large steel company fell through at the last minute--it chanced upon Envirodyne Industries, a small but rapidly growing company specializing in pollution-control technology. Envirodyne had no experience in the steel industry, and a net worth of only $4 million, yet it offered to buy Wisconsin Steel for $65 million plus assumption of all of Wisconsin Steel's liabilities, which amounted to some $100 million, including the pension liability. The deal closed in 1977.

How was it possible for a minnow to swallow a whale like this? By a leveraged buyout, a device Envirodyne had exploited successfully in the past. Envirodyne pledged the assets of Wisconsin Steel to the lenders who advanced it the money necessary for the purchase. A major lender was Harvester itself, which accepted a note for $50 million rather than insisting on receiving the full $65 million purchase price in cash. Everyone recognized that the purchase was a gamble. Envirodyne was small and had no experience in the steel industry. Wisconsin Steel had been on the block for months without attracting a buyer; it needed a massive injection of new capital to have a hope of prospering; it had huge liabilities. Harvester, to minimize the risk to itself that Envirodyne would default on the $50 million note, took back a security interest in Wisconsin Steel's coal and iron mines, its most valuable properties. Envirodyne, to minimize its own risk, created several new subsidiaries (which for simplicity's sake we are treating as one, EDC) to own the assets--and liabilities--that it was acquiring from Harvester. Envirodyne hoped that the principle of limited liability would shield it from liability should it fail to make a go of Wisconsin Steel. It failed.

At first, it is true, things went well...

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