In re Almac's, Inc., Civil Action No. 95-360L
| Decision Date | 15 November 1996 |
| Docket Number | Misc. No. 95-052L.,Civil Action No. 95-360L |
| Citation | 202 BR 648 |
| Parties | In re ALMAC'S, INC. and Almac's Supermarkets, Inc., Confirmed Debtors. Arnold ZAHN, as Trustee of the Almac's Creditor Litigation and Distribution Trust, Plaintiff, v. YUCAIPA CAPITAL FUND, Yucaipa Capital Advisors, Inc., Yucaipa Almac's Partners, L.P., Almac's Partners, L.P., the Yucaipa Companies, Yucaipa Companies, Yucaipa Management Company, Ronald W. Burkle, Joe S. Burkle, Mark A. Resnik, Richard d'Abo, Citicorp Securities Markets, Inc., Citicorp North America, Inc., and Citibank, N.A., Defendants. |
| Court | U.S. District Court — District of Rhode Island |
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James R. McGowan, Matthew J. McGowan, Salter, McGowan & Swartz, Providence, RI, Timothy J. Hurley, Stephen D. Lerner, Raymond W. Lembke, Timothy C. Sullivan, W. Timothy Miller, Taft, Stettinius & Hollister, Cincinnati, OH, for plaintiff.
Joseph V. Cavanagh, Jr., Michael W. Carroll, Blish & Cavanagh, Providence, RI, James R. Warnot, Jr., Richard A. Lingg, R. Paul Wickes, Shearman & Sterling, New York City, for Citicorp defendants.
Matthew F. Medeiros, Flanders & Medeiros, Providence, RI, Robert J. Rosenberg, James E. Brandt, Latham & Walkins, New York City, for Yucaipa defendants.
This case arises from a leveraged buyout that took place prior to the time Almac's Inc. and Almac's Supermarkets, Inc. (collectively "Almac's") filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Arnold Zahn, as the trustee of the Almac's Creditor Litigation and Distribution Trust (the "Trustee"), claims that payments made by Almac's to the various Yucaipa1 and Citicorp2 Defendants in connection with the leveraged buyout (the "1991 LBO") constitute fraudulent transfers under Rhode Island law. In addition, the Trustee has sued three individual Yucaipa Defendants, Ronald W. Burkle, Joe S. Burkle, and Mark A. Resnik, who served as directors of Almac's, alleging that they breached their fiduciary duties to Almac's under Delaware General Corporation Law by participating in the 1991 LBO.
This matter is before the Court on the motions of the Yucaipa Defendants and the Citicorp Defendants to withdraw the reference from the Bankruptcy Court pursuant to 28 U.S.C. § 157(d). For the reasons that follow, the motions of both the Yucaipa Defendants and the Citicorp Defendants are granted as to Counts I-IV. This Court concludes, however, that the Bankruptcy Court must dismiss Count V for lack of subject matter jurisdiction. Since the Trustee lacks standing to pursue Count V, he cannot replead it in this Court under 28 U.S.C. § 1332.
The following facts are undisputed, except as noted. Prior to 1989, Almac's and its affiliate Rhode Island Produce Company (collectively "Old Almac's") were Rhode Island corporations operating grocery stores. On or about July 27, 1989, the Yucaipa Defendants formed a Delaware corporation, Almac's Inc., for the purpose of purchasing substantially all of the operating assets of Old Almac's. In February of 1991, Almac's Inc. was reorganized again as a wholly-owned subsidiary of Almac's Supermarkets, Inc. ("ASI"), another Delaware corporation. The Yucaipa Defendants owned at least 85% of the common stock of ASI.
In 1991, Almac's was the subject of a leveraged buyout — the root of the present litigation. During the 1991 LBO, the majority ownership of Almac's was transferred from the Yucaipa Defendants to a corporation called MAFCO. The partnership of Leonard Green and Partners had created MAFCO, later renamed Almac's Supermarkets Group, Inc., for the purpose of acquiring the Yucaipa Defendants' stock in Almac's.
In connection with the 1991 LBO, Almac's effected many money transfers in the total amount of $59 million. To finance the transfers and to repay some existing indebtedness, Almac's borrowed approximately $94 million dollars from a bank syndicate (the "Lenders"), to which Almac's granted liens on substantially all of its assets. The most important transfer for purposes of the present controversy was Almac's payment of $44 million to MAFCO.3 After receiving this dividend, MAFCO paid $63 million to the Yucaipa Defendants in payment for their Almac's stock.
Almac's also paid approximately $4.0 million to the Citicorp Defendants as compensation for their services in the financing of the 1991 LBO. Citibank, N.A. had placed a $44 million syndicated term loan to Almac's and provided other services in connection with that loan. In addition, Citicorp Securities Markets, Inc. served as placement agent for $50 million in senior secured Almac's notes and acted as advisor in the structuring of the transaction. Finally, Citicorp North America, Inc. participated in the term loan and was also lead lender on a revolving credit facility provided to Almac's in the amount of $10 million.
On August 2, 1991, before the purchase of the majority of the Yucaipa Defendants' stock was completed, the director defendants resigned from the board of directors of Almac's. However, as part of the 1991 LBO, Almac's also entered into new consulting agreements with defendants Joe S. Burkle and the Yucaipa Companies. Pursuant to the agreements, Almac's agreed to pay Joe S. Burkle approximately $208,000 per year and The Yucaipa Companies a minimum of $100,000 per year, for a period of years following the 1991 LBO.
Almac's continued to operate, but began experiencing financial difficulties in 1992. In 1993, its operations and sales experienced significant decline, and on August 6, 1993, Almac's Inc. and Almac's Supermarkets, Inc. filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. During the bankruptcy proceedings, the Citicorp Defendants and Joe S. Burkle filed proofs of claim. On November 8, 1994, the Bankruptcy Court confirmed the Third Amended Consolidated Chapter 11 Plan of Reorganization for Almac's (the "Plan"). The effective date of the Plan was in December of 1994, and it is uncontested that the Plan has been substantially consummated.
Pursuant to the Plan, a company called New Almacs was formed for the purpose of acquiring Almac's assets. New Almacs is a wholly-owned subsidiary of Victory Holdings, Inc., a company that operates supermarkets in central and upstate New York. On the effective date of the Plan, New Almacs acquired all of Almac's operating assets and assumed the operation and management of its business.
Both the Plan and the Disclosure Statement expressly contemplate the pursuit of avoidance claims against the Yucaipa and Citicorp Defendants. Pursuant to the Plan, on the effective date, the Debtors transferred the right to pursue "avoidance claims" against the Yucaipa and Citicorp Defendants to the Trustee.
The Plan defines "avoidance claims" as follows:
all preference, fraudulent transfer, fraudulent conveyance, equitable subordination and other similar claims, whether arising under the Bankruptcy Code or otherwise, of the Debtors, or either Debtor, including, but not limited to, claims recoverable pursuant to Bankruptcy Code sections 502, 510, 541, 544, 545, 547, 548, 550, 551 and 553.
However, the Plan provided that the exclusive right to enforce any causes of action other than avoidance claims vests in New Almac's, Inc. which is owned by the Purchaser, Victory Holdings, Inc.:
Except for the Released Actions and the Avoidance Claims to be assigned to the Creditor Litigation and Distribution Trust pursuant to Section 8.3 hereof, on and as of the Effective Date, all rights and interests of the Consolidated Estates in respect of any and all claims, demands, actions and causes of action, including but not limited to claims under Sections 510(c), 544, 547, 548, and 550 of the Bankruptcy Code, shall be assigned to New Almacs pursuant to the New Almacs Purchase Agreement, without any representations or warranties.
The Plan expressly provided for the distribution of the proceeds of avoidance claims. The Disclosure Statement in Support of the Second Amended Consolidated Plan of Reorganization for Almac's summarized the complex distribution scheme as follows:
The proceeds will be distributed first to reimburse New Almacs for $500,000 to be advanced by New Almacs to the Creditors Litigation and Distribution Trustee on the Effective Date and to pay the costs of the litigation in excess of the funded costs, to a maximum of $500,000; next to a bonus fee provided to professionals hired to pursue the litigation and to the payment of the unpaid portion of the $3.0 million New Almacs Junior Subordinated Obligation; next to the repayment to New Almacs of its payments on the New Almacs Junior Subordinated Obligation; next to remaining litigation costs; and last to be split 75% to the Class 3A Claimants the unsecured creditors and 25% to New Almacs.
In essence, from any recovery under the avoidance claims, the Trustee would have to pay approximately $3.0 million to the Purchaser as well as legal fees and expenses, before the unsecured creditors begin to receive their 75% share of the proceeds. Memorandum of Law in Support of Citicorp Defendants' Motion to Dismiss Complaint at 14.
The Plan also expressly delineated the scope of the Bankruptcy Court's retained jurisdiction. Article XI of the Plan provides in pertinent part:
Notwithstanding Confirmation or the Effective Date having occurred, the Bankruptcy Court shall retain full jurisdiction as provided in 28 U.S.C. section 1334 to enforce the provisions, purposes, and intent of this Plan including, without limitation . . . adjudication of any causes of action brought or continued by the Debtors, New Almacs as assignee of the Debtors, the Disbursing Agent, and the Creditor Litigation and Distribution Trustee with respect to the Avoidance Claims assigned to it.
On May 9, 1995, the Trustee filed his complaint against the Yucaipa and Citicorp Defendants in Bankruptcy Court. Counts I, II, III, and IV seek to...
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