Halperin v. Morgan Stanley Inv. Mgmt., Inc. (In re Tops Holding II Corp.)

Citation646 B.R. 617
Decision Date12 October 2022
Docket NumberCase No. 18-22279 (RDD) (Jointly Administered),Adv. Pro. No. 20-08950
Parties IN RE: TOPS HOLDING II CORPORATION, et al., Debtors. Alan D. Halperin, as the Litigation Trustee for the Tops Holding Litigation Trust, Plaintiff, v. Morgan Stanley Investment Management, Inc., et al., Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

McKOOL SMITH, P.C., by Kyle A. Lonergan, Esq., James H. Smith, Esq., Joshua Newcomer, Esq., Mike McKool, Esq., and Lewis T. LeClair, Esq. for Plaintiff Alan D. Halperin, as the Litigation Trustee for the Tops Holding Litigation Trust.

O'MELVENY & MYERS LLP, by Pamela A. Miller, Esq., Peter Friedman, Esq., Daniel S. Shamah, Esq., and Patrick D. McKegney, Esq. for Defendants Morgan Stanley Investment Management, Inc., Morgan Stanley Capital Partners V U.S. Holdco LLC, Gary Matthews, Eric Kanter, and Eric Fry.

GREENBERG TRAURIG, LLP, by Louis Smith, Esq., Alan J. Brody, Esq., and Matthew F. Bruno, Esq. for Defendants HSBC Equity Partners USA, L.P. and HSBC Private Equity Partners II USA LP.

PATTERSON BELKNAP WEBB & TYLER LLP, by Daniel A. Lowenthal, Esq., for Defendant Begain Company Limited.

ALSTON & BIRD LLP, by Jonathan T. Edwards, Esq., Steven Campbell, Esq., and Evan Glasner, Esq. for Defendant Turbic Inc.

RICHARDS KIBBE & ORBE LLP, by David B. Massey, Esq., Gregory G. Plotko, Esq., and Rebecca L. Salk, Esq. for Defendants Gregory Josefowicz and Stacey Rauch.


Robert D. Drain, United States Bankruptcy Judge

Introduction 1

In late 2007 a group of private investors led by Morgan Stanley, defined below, acquired

[646 B.R. 638]

the stock of the predecessor of Tops Holding II Corporation, which with its affiliated debtors in these chapter 11 cases (together, "Tops" or the "Debtors"),2 before this bankruptcy case owned and operated 169 supermarkets in upstate New York, northern Pennsylvania, and Vermont3 employing about 14,000 people, including over 12,300 union members.4 The private equity group paid approximately $300 million for the purchase, although $200 million of such sum plus transaction fees was funded with secured debt incurred by Tops and only $100 million came from the investors themselves.5

Before the acquisition, Tops’ contingent pension plan withdrawal liabilities so concerned Morgan Stanley that it decreased its offer from $415 million to $300 million when the seller refused to indemnify the purchasers or otherwise curtail or eliminate the withdrawal liability risk.6 In its 2007 internal investment committee memo, Morgan Stanley stated that the primary pension plan "is significantly underfunded, and we are concerned that this liability ... would seriously threaten the financial health of Tops if it were assumed as part of the deal" and, with other pension plan exposure, likely "scared away" other potential bidders.7 Tops’ pre-acquisition contingent pension-related liabilities came from two sources. First, Tops was the largest participating employer in the United Food & Commercial Workers Local One Pension Plan (the "UFCW Pension Plan") and was responsible for the vast majority of its liabilities.8 Because of significant underfunding, the UFCW Pension Plan was in "critical status,"9 and subject to a legally required rehabilitation plan.10

[646 B.R. 639]

Tops made only the minimum required annual payments to the UFCW Pension Plan thereunder, equaling less than 50% of the annual benefit payment by the Plan, and, notwithstanding those payments, the UFCW Pension Plan's underfunding continued to increase each year after the acquisition.11 Second, under a Supply Agreement with C&S Wholesale Grocers, Inc. ("C&S"), Tops indemnified C&S for any pension withdrawal liability under the New York State Teamsters Conference Retirement Fund/Teamsters Local Pension Fund (the "Teamsters Pension Plan;" with the UFCW Pension Plan, the "Pension Plans").12

Over the next six years while Tops not only was under Morgan Stanley's controlling ownership but also its day-to-day control of business decisions,13 Tops’ contingent pension-related withdrawal liabilities grew significantly, from $85 million upon the acquisition to over $515 million in May 2013,14 the month of the last transfer to the private equity investors challenged by the Complaint. Tops’ funded debt, almost entirely secured,15 also grew, from $227 million after the acquisition to $649 million in May 2013,16 and Tops severely constrained its investment in its stores,17 a risky practice in the grocery industry.18

Nevertheless, during those six years Tops also paid over $375 million in four dividends to the private equity investors, funded not from operations but from the proceeds of almost entirely secured loans and the curtailment of capital expenses,19 with Morgan Stanley receiving the lion's share, a handsome rate of return on investment, to say the least.20 As stated by Tops’ CFO, Morgan Stanley's "intent [was] to take every nickel plus" in the dividends.21 The Complaint contends that each dividend -- along with Tops’ contingent pension plan liabilities, increased funded debt, and curtailed capital expenditures -- rendered Tops insolvent and insufficiently capitalized, and that Tops believed that after making each of the dividends, it would not be able to pay its debts, which

[646 B.R. 640]

included the contingent pension liabilities, as they came due.22

Tops obtained favorable solvency opinions before the issuance of three of the dividends,23 but the Complaint contends that those opinions were so flawed in their formulation and on their face, as well as diverging from other evidence in Morgan Stanley and Tops’ possession regarding Tops’ financial condition, that they not only should be disregarded without appropriate corrections that would show Tops to have been insolvent at the relevant times,24 but also, in context -- including that Tops took no meaningful measures to address its ever-increasing contingent pension plan liabilities25 along with Tops’ increased borrowing, and capital expenditure reductions -- show that (a) Tops acted with fraudulent intent in issuing the dividends and (b) its directors wrongfully permitted that to happen in 2012 and 2013 when claims against them for such conduct are not time-barred.26 The same can be said of Tops’ payment of the 2010 dividend, based on there being no solvency opinion, proper adjustments to the 2009 solvency opinion for contingent Pension Plan obligations that the 2009 opinion ignored, and Tops’ increasing indebtedness between the 2009 and 2010 dividends.27 Moreover, even disregarding the flaws in the solvency opinions, they, along with Morgan Stanley's own view of what would be a proper post-dividend capital surplus, show that the dividends left Tops with insufficient capital and that Tops believed it would incur debts beyond its ability to pay as they matured.28

Having failed to sell their stake in Tops to outside investors in 2012, in large measure because the market was wary of Tops’ financial condition, including its contingent pension-related liabilities,29 the private equity investors obtained their last dividend in May 201330 (at the same time that management received bonuses ranging from $75,000 to over $2 million)31 and entered into a Purchase and Sale Agreement, dated December 3, 2013, under which they sold their stock to an entity controlled by Tops’ senior management for, according to the Complaint, "a pittance, with Tops itself funding the vast majority of the purchase price"32 and the management group funding $4.3 million.

[646 B.R. 641]

Tops filed for protection under the Bankruptcy Code on February 21, 2018.33 The Court confirmed Tops’ joint chapter 11 plan (the ("Plan") on November 9, 2018, under which it emerged as a reorganized business having shed hundreds of millions of dollars of funded secured debt in return for new, substantially reduced secured debt and all of the equity in the reorganized company, with the exception of reserved equity for a management incentive plan. As part of its chapter 11 case, Tops also terminated the UFCW Pension Plan and settled its liability to the Teamster's Pension Plan for a modest amount and left over $1 billion in creditor losses.34 The Plan established the GUC Litigation Trust (the "Trust") for the benefit of Tops’ unsecured creditors,35 with Alan D. Halperin as trustee and Trust assets including the causes of action based on the payment of the dividends alleged in the Complaint.36

The Complaint asserts thirteen claims -- against Morgan Stanley Investment Management Inc. d/b/a Morgan Stanley Private Equity and Morgan Stanley Capital Partners ("MSIM"), Morgan Stanley Capital Partners V U.S. Holdco LLC a/k/a North Haven Capital Partners V U.S. Holdco LLC ("MSCP V Holdco;" together with MSIM, "Morgan Stanley"); HSBC Equity Partners USA, L.P. ("HSBC I"), HSBC Private Equity Partners II USA LP ("HSBC II," and with HSBC I, "HSBC"); Turbic Inc. ("Turbic"); and Begain Company Limited ("Begain;" collectively with Morgan Stanley, HSBC, and Turbic, the "Private Equity Investors"); and Gary Matthews ("Matthews"), Eric Kanter ("Kanter"), Eric Fry ("Fry;" collectively with Matthews and Kanter, the Morgan Stanley Director Defendants"), Greg Josefowicz ("Josefowicz"), and Stacey Rauch ("Rauch;" collectively with the Morgan Stanley Director Defendants and Josefowicz, the "Director Defendants;" and together with the Private Equity Investors, the "Defendants"), to avoid under New York's Debtor and Creditor Law ("NY DCL"),37 as incorporated by section 544(b) of the Bankruptcy Code, the four dividends to the Private Equity Investors as constructive and intentional fraudulent transfers and to recover them under section 550 of the Bankruptcy Code (Counts I-VIII); for damages, in each case related to the consideration and approval of the 2012 and 2013 dividends, against the Director Defendants under New York's Business Corporation Law ("NY BCL") based on the unlawful authorization...

To continue reading

Request your trial
1 firm's commentaries

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