In re Aluminum Mills Corp., Bankruptcy No. 90 B 04050

Decision Date01 October 1991
Docket NumberBankruptcy No. 90 B 04050,Adv. No. 90 A 0934.
Citation132 BR 869
PartiesIn re ALUMINUM MILLS CORPORATION, Debtor. ALUMINUM MILLS CORPORATION, By and Through its OFFICIAL UNSECURED CREDITORS COMMITTEE, Plaintiff, v. CITICORP NORTH AMERICA, INC., a Delaware Corporation, Frederick S. Miller, Denis A. Mola, John D. Mull, Armand, Miller & Mull, Inc., an Illinois Corporation, Sigma Associates, Inc., an Illinois Corporation, IBJ Schroder Bank & Trust Co., a New York Banking Corporation, Charles D. Gelatt, and the Gelatt Corporation, a South Dakota Corporation, Defendants.
CourtU.S. Bankruptcy Court — Northern District of Illinois

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Mark L. Prager, Foley & Lardner, Chicago, Ill., for plaintiff.

Chester H. Foster, Jr., Durkin, Foster & Roberts, Chicago, Ill., for defendants Miller, Mola, Mull, Armand, Miller & Mull, Incorporated and Sigma Associates, Inc.

Francis X. Gross, Jr., Mark K. Thomas, Jeff J. Marwill, Debra A. Harvey, Amy A. Hijjawi, Katten, Muchin & Zavis, Chicago, Ill., for defendant Citicorp North America, Inc.

David E. Leichtfuss, Michael, Best & Friedrich, Milwaukee, Wis., James R. Troupis, Ann Ustad Smith, Steven P. Means, Michael, Best & Friedrich, Madison, Wis., for defendant Gelatt and Gelatt Corp.

                CONTENTS
                Subject                                                              Page
                Introduction..........................................................875
                Facts alleged.........................................................875
                    The Parties ......................................................875
                    Events Prior to the LBO ..........................................876
                    The LBO ..........................................................878
                    Post-LBO Projections and Loans....................................879
                    Debtor's Releases on the Eve of Bankruptcy .......................880
                The Complaint ........................................................880
                Jurisdiction .........................................................882
                Standards on Rule 12(b)(6) Motions to Dismiss.........................882
                
                Standards on Rule 9(b) Motions to Dismiss................................................882
                Committee Standing to Prosecute Fraudulent Conveyance Claims as
                 Estate Property.........................................................................884
                Elements of a Fraudulent Conveyance......................................................885
                   (a) Intentional Fraud-§ 548(a)(1) and Ill.Rev.Stats. ch. 59 ¶ 4 ............885
                   (b) Constructive Fraud — Fraud in law under Section 4 of Rev.Stats
                        ch. 59...........................................................................888
                Breach of Fiduciary Duty.................................................................891
                Inducement of Breach of Fiduciary Duty...................................................892
                Preferential Transfers — Section 547...............................................892
                Equitable Subordination — Section 510(c)...........................................893
                Conclusion...............................................................................896
                
MEMORANDUM OPINION ON DEFENDANTS' MOTIONS TO DISMISS

JACK B. SCHMETTERER, Bankruptcy Judge.

Plaintiff and debtor-in-possession Aluminum Mills Corporation ("Debtor"), by and through its Official Committee of Unsecured Creditors ("Committee"), has filed a nine count Complaint against the following parties: Citicorp North America, Inc. ("Citicorp"); Frederick S. Miller ("Miller"); Denis A. Mola ("Mola"); John D. Mull ("Mull"); Armand, Miller & Mull, an Illinois corporation ("AM & M"); IBJ Schroder Bank & Trust Co., a New York banking corporation ("Schroder"); Charles D. Gelatt ("Gelatt"); and, the Gelatt Corporation, a South Dakota corporation ("Gelatt Corp.") (collectively, the "Defendants").

The Complaint alleges that a January 1988 leveraged buyout of the assets of Debtor (the "LBO") constituted various fraudulent and preferential transfers to Defendants under the Illinois Fraudulent Conveyance Act and Sections 548 and 547 of the Bankruptcy Code ("Code"). The Complaint seeks to avoid those asserted transfers pursuant to Section 544(b) of the Code. The Complaint also alleges that certain Defendants breached their fiduciary duty to Debtor and its unsecured creditors by consummating the LBO.

Defendants have each filed a motion under F.R.Bankr.P. 7012 (R. 12 F.R.Civ.P.) to dismiss various counts of the Complaint (the "Motions"). Following the hearing held May 20, 1991 and having considered the pleadings and briefs filed, the Court denies all Motions for reasons stated below.

FACTS ALLEGED

The following facts are pleaded.

The Parties

Prior to January 15, 1988, "Aluminum Mills Corporation" was the name of an Illinois corporation that operated a cold rolling aluminum plant in Lincolnshire, Illinois ("Old Aluminum Mills"). The business of Old Aluminum Mills began in March 1960. In January 1966, Defendant Charles D. Gelatt ("Gelatt"), either individually or through one or more corporations owned or controlled by him, purchased Old Aluminum Mills.1 Gelatt continued to own and control Old Aluminum Mills until the events which transpired in January 1988.

Prior to January 1988, plaintiff and debtor-in-possession Aluminum Mills Corporation ("Debtor," "Aluminum Mills") was known as Aluminum Mills Acquisition Corporation ("AMAC"). AMAC was comprised of certain officers and directors of Defendant AM & M Debtor, by and through the Committee,2 brings this action against several defendants. Defendants Citicorp and Schroder are alleged to have been the lenders who provided financing for the LBO. Defendant AM & M is engaged in the investment banking business and was retained by Aluminum Mills to procure funding for the LBO. Defendants Miller, Mola, and Mull were and are shareholders and managing directors of AM & M. In addition, Miller, Mull, and Mola were and are directors of Aluminum Mills. Miller is also the sole owner of Defendant Sigma, an Illinois corporation.

As previously mentioned, Defendant Gelatt was the owner of Old Aluminum Mills prior to the January 1988 LBO. Gelatt became an officer of AMAC prior to or around the time of the LBO. As a result of the LBO, Defendant Gelatt Corp. became the successor in interest to Old Aluminum Mills.

Events prior to the LBO

At the request of Old Aluminum Mills, sometime prior to August 1987 Harris Trust & Savings Bank ("Harris") prepared a written analysis of a possible leveraged buyout of Old Aluminum Mills ("Harris Analysis"). In its Complaint, the Committee alleges that after reviewing several LBO alternatives, the Harris Analysis concluded that a $30,000,000 leveraged buyout would render the company insolvent, leaving it with a negative net worth of approximately $6,678,000. The Complaint further alleges that the Harris Analysis was prepared at the direction of and was made available to the directors and shareholders of Old Aluminum Mills and that Defendants Gelatt, Citicorp, Miller, Mull, Mola, and AM & M were all aware of the conclusions and recommendations contained in the Harris Analysis prior to the January 1988 LBO.

On or about October 30, 1987, certain officers and directors of AM & M formed AMAC for the alleged purpose of acquiring all the assets and operations of Old Aluminum Mills. AMAC was a shell corporation with no assets, liabilities, or operations of its own. AMAC was owned and controlled by limited partnerships which were and are owned or controlled by Defendants Miller, Mull, Mola, and AM & M (collectively, the "Purchasing Defendants").

On November 11, 1987, AMAC entered into an Asset Purchase Agreement with Old Aluminum Mills under which AMAC agreed to purchase all of the assets and assume or retire virtually all of the liabilities of Old Aluminum Mills (the "Agreement"). Gelatt executed the Agreement on behalf of Old Aluminum Mills while Mull acted for AMAC.

The Agreement provided that AMAC would pay Old Aluminum Mills $34,000,000 in cash at closing, would retire a $3,000,000 promissory note owed by Old Aluminum Mills to A.M. of Illinois, Inc., and would issue 9,000 shares of AMAC's preferred stock, valued at approximately $9,000,000, to Charles Gelatt, for a total purchase price of $34,000,000.

AMAC retained AM & M, an investment banking firm allegedly controlled by the other Purchasing Defendants, to arrange financing for the proposed LBO. The Complaint alleges that the Purchasing Defendants paid AM & M a $650,000 fee for its services and that such fees were to be paid from loans to AMAC, which loans were to be secured by the assets of Aluminum Mills.

The Purchasing Defendants prepared an Acquisition Financing Memorandum ("Purchasing Memorandum") which they presented to various financial institutions for the purpose of obtaining loans to fund the LBO. The Purchasing Memorandum contained projections of Debtor's sales, revenues, cash flow, profits, and anticipated financial performance for a ten year period following the LBO. The Complaint alleges that the Purchasing Defendants knew or should have known that due to certain circumstances, the income and cash flow projections were false and misleading, and that Debtor would be unable to meet its obligations as they became due after the LBO.

In particular, the Committee contends that the Purchasing Memorandum predicted that after the LBO Aluminum Mills would be able to meet its obligations as they became due only if the following events occurred: the 21 acres of vacant land adjacent to the Aluminum Mills plant was sold for an estimated $2,056,000; Aluminum Mills received substantial tax refunds resulting from tax loss carrybacks; Aluminum Mills' sales increased by approximately 35 percent in 1988 and the cost of producing its products increased by only approximately 28 percent; and, the plant, which was operating at 30 to 40 percent capacity...

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