98 F.3d 604 (11th Cir. 1996), 94-9046, Matter of Munford, Inc.

Docket Nº:94-9046.
Citation:98 F.3d 604
Party Name:Matter of MUNFORD, INC., a/k/a Majik Market, Debtor. Danne Brokaw MUNFORD, as Executrix of the Estate of Dillard Munford; James M. Carroll; Russell Fellows; Joseph W. Hardin; Jay Rubel; Winston M. Blount; Herbert J. Dickson; James L. Ferguson; Robert M. Gardiner; Richard K. Leblond; Andrall E. Pearson; S.B. Rymer, Jr., Shearson Lehman Brothers, Inc
Case Date:October 28, 1996
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

Page 604

98 F.3d 604 (11th Cir. 1996)

Matter of MUNFORD, INC., a/k/a Majik Market, Debtor.

Danne Brokaw MUNFORD, as Executrix of the Estate of Dillard

Munford; James M. Carroll; Russell Fellows; Joseph W.

Hardin; Jay Rubel; Winston M. Blount; Herbert J. Dickson;

James L. Ferguson; Robert M. Gardiner; Richard K.

Leblond; Andrall E. Pearson; S.B. Rymer, Jr., Shearson

Lehman Brothers, Inc.; DFA Investment Dimensions Group,

Inc.; State Street Bank & Trust Company; PNC Bank,

National Association; Boston Safe Deposit and Trust

Company, Plaintiffs-Appellees,



Munford, Inc., Defendant-Appellant.

No. 94-9046.

United States Court of Appeals, Eleventh Circuit

October 28, 1996

Page 605

Susan A. Cahoon, Neal S. Berinhout, Kilpatrick & Cody, Atlanta, GA, Kenneth L. Millwood, Nelson, Mullins, Riley & Scarborough, Atlanta, GA, for defendant-appellant.

David E. Bennett, Vedder, Price, Kaufman & Kammholz, Chicago, IL, Edward H. Wasmuth,

Page 606

Jr., Thomas W. Rhodes, Smith, Gambrell & Russell, Atlanta, GA, Leon S. Jones, Joseph J. Burton, Jr., Burton & Anderson, Atlanta, GA, Peyton S. Hawes, Jr., Law Offices of Peyton S. Hawes, Jr., Atlanta, GA, John H. Williamson, Gregory R. Hanthorn, R. Matthew Martin, Jones, Day, Reavis & Pogue, Atlanta, GA, C. Murray Saylor, Ragsdale, Beals, Harper & Seigler, Atlanta, GA, Randall Quinn, Katharine Gresham, Jacob Stillman, SEC, Washington, DC, for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and

MILLS [*], District Judge.


As a matter of first impression in this circuit, we hold that 11 U.S.C. § 546(e) does not bar the trustee in bankruptcy from avoiding payments the debtor corporation made to its shareholders in a leveraged buy-out.


In August 1987, Dillard Munford, the founder and chief executive officer of Munford, Inc., suggested to Munford, Inc.'s board of directors (the board) that it sell Munford, Inc. At that time, Munford, Inc., a public company, operated three specialty retailer stores: Majik Market, a chain of convenience stores; World Bazaar, a chain of stores specializing in imported goods; and Lee Ward's Creative Crafts, an arts and crafts chain. Munford, Inc. also owned a majority interest in United Refrigerator Services, Inc. (URS). Based on Dillard Munford's suggestion, the board retained Shearson Lehman Brothers (Shearson) to evaluate Munford, Inc.'s financial viability and its fair market value. Following this evaluation, Shearson would make recommendations regarding how to best maximize shareholder value in the event the board decided to sell Munford, Inc.

In September 1987, Shearson presented a written report to the board identifying several selling options. Shearson, for example, opined that a sale of all of Munford's common stock would afford Munford, Inc. the most desirable means of maximizing shareholder value while preserving its financial viability. In contrast, Shearson disfavored a leverage buy-out (LBO) or a leverage recapitalization opining that Munford, Inc. would need all of its internally generated cash flow to fund growth. Consequently, Shearson believed that Munford, Inc. could not carry the heavy debt load associated with a leverage transaction. After reviewing Shearson's report, the board authorized Shearson to prepare an offering memorandum and solicit potential purchasers for Munford, Inc. During this same period of time, Munford, Inc. executed severance contracts with senior officers Dillard Munford, Russell C. Fellows, and James M. Carroll agreeing to pay these officers severance pay in yearly installments upon the closing of the sale of Munford, Inc. In exchange, these officers promised to continue their employment with Munford, Inc. until it secured a purchaser. Despite Shearson's aggressive efforts to solicit potential purchasers of Munford, Inc., no one offered to purchase all of Munford, Inc.'s common stock. Faced with this reality, the board began considering LBO offers.

In January 1988, Deutschman & Co. offered to purchase Munford Inc.'s stock in an LBO. In February 1988, the board tentatively agreed to sell Munford, Inc. to Deutschman, but Deutschman withdrew its offer on March 3, 1988, after performing a due diligence examination. On May 2, 1988, Munford, Inc. sold its Lee Ward's stores to Prudential Bache because it had failed to secure a single purchaser for Lee Ward's stock. Later that month, the board received an offer from the Panfida Group to purchase its Majik and World Bazaar stores for $18.50 per share. On May 23 the board met with its lawyers and Shearson's representatives to consider the Panfida Group's offer. At that meeting, Munford Inc.'s lawyers advised the board that they had consulted with Citicorp

Page 607

and Citicorp confirmed its willingness to work with the Panfida Group. Shearson also advised the board that the Panfida Group had the backing of a company with assets in excess of $60 million. In addition, Shearson's representative stated that he was favorably impressed with the Panfida Group's ability to obtain financing. On June 1, 1988, Phillip Handy, the spokesperson for the Panfida Group, met with the board to discuss the proposal. During the meeting, Handy informed the board that the Panfida Group had purchased 291,177 shares of Munford, Inc. stock as evidence of its commitment to purchase Munford, Inc. Handy also noted that the Panfida Group intended to put additional capital into the company; however, he also advised the board that Panfida's equity participation would only be as much as Citibank required to finance the purchase.

On June 17, Munford, Inc. sold its stock in URS for $45.5 million and used the proceeds to pay company debt. Also during the month of June, the Panfida Group and Citicorp began a due diligence examination of Munford Inc.'s business records. After discovering potential environmental liability at some of the Majik stores, the Panfida Group decided to reduce its purchase price from $18.50 a share to $17 a share. The board approved the Panfida Group's new offering price and the proposed merger agreement. The proposed merger agreement required the Panfida Group to create Alabama Acquisition Corporation (AAC) and a subsidiary, Alabama Merger Corporation (AMC). The merger agreement also required the Panfida Group through AAC or AMC to deposit the funds necessary to purchase Munford Inc.'s outstanding stock with Citizens & Southern Trust Company, a financial institution within the securities clearance and settlement system.

Prior to finalizing the merger plan, AAC warranted to the board that the post-merger Munford, Inc. would remain solvent, would have a reasonable amount of working capital, and would have the ability to pay its debts as they came due. After receiving this assurance, Munford, Inc.'s lawyers prepared a detailed proxy statement for Munford, Inc.'s 3,100 shareholders outlining the merger agreement. 1 On October 18, 1988, the shareholders approved the merger plan. As provided in the merger agreement, each share of common stock was converted into the right to receive the merger price of $17 per share and extinguished the shareholders' ownership interest in Munford, Inc. The Panfida Group retired the 291,177 shares it purchased prior to the LBO merger without payment. The sale of Munford, Inc. to the Panfida Group closed on November 29, 1988. Thirteen months after the LBO transaction, on January 2, 1990, the post-Munford Corporation filed a Chapter 11 case in bankruptcy court.


On June 17, 1991, Munford, Inc. filed an adversary proceeding in bankruptcy court in the Northern District of Georgia on behalf of itself and unsecured creditors pursuant to 11 U.S.C. §§ 544(b) and 1107(a) (1988), seeking to recover LBO payments made to Munford, Inc.'s shareholders, severance payments made to Munford, Inc.'s officers and damages against directors, officers, and Shearson for breach of fiduciary obligations to Munford, Inc.

In Count I of Munford, Inc.'s complaint, it asserts fraudulent conveyance claims against two of Munford, Inc.'s largest former shareholders, the DFA Investment Dimensions Group, Inc. and Trustees of the DFA Group Trust. In Count I, Munford, Inc. also asserts fraudulent conveyance claims against former directors and officers who received payments for their Munford, Inc. shares in the LBO. 2 In Counts II and IV, Munford,

Page 608

Inc. asserts breach of fiduciary duty, negligence, mismanagement, and waste of corporate assets claims against the officers...

To continue reading