In re Chateaugay Corp., Bankruptcy No. 86 B 11270 (BRL)—86 B 11334 (BRL)
| Decision Date | 21 June 1993 |
| Docket Number | Bankruptcy No. 86 B 11270 (BRL)—86 B 11334 (BRL),86 B 11402 (BRL) and 86 B 11464 (BRL). |
| Parties | In re CHATEAUGAY CORPORATION, Reomar, Inc., The LTV Corporation, et al., Debtors. LTV AEROSPACE AND DEFENSE COMPANY, Vought Industries, Inc. and Vought International, Inc., Plaintiffs, v. THOMSON-CSF, S.A. and VT Missile Company, Defendants and Counterclaim Plaintiffs, v. The LTV CORPORATION, LTV Aerospace and Defense Company, Vought Industries, Inc. and Vought International, Inc., Counterclaim Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Kaye, Scholer, Fierman, Hays & Handler, New York City (Myron Kirschbaum, Scott Berman, Deborah Lewis, and Donald Levinsohn, of counsel), for plaintiffs and counterclaim defendants.
Shearman & Sterling, New York City (George J. Wade, and Alan Goudiss, of counsel), for defendants and counterclaim plaintiffs.
This adversary proceeding arises out of the application, dated March 3, 1992 (the "Application"), of The LTV Corporation, LTV Aerospace and Defense Company ("LTVAD") and certain affiliated entities (collectively, "LTV") for an order, pursuant to sections 105, 363 and 365 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330 (1993) (the "Code"), authorizing the transfer of substantially all of the assets of the aircraft and missiles divisions of LTVAD to the Vought Corporation ("Vought"), a joint venture formed by subsidiaries of Lockheed Corporation ("Lockheed") and Martin Marietta Corporation ("Martin Marietta"), for consideration valued at approximately $355 million, subject to higher and better offers. On April 10, 1992, following a highly publicized bidding contest and extensive hearings on the Application, this Court approved a competing joint offer for LTVAD's assets submitted by The Carlyle Group, a Washington, D.C. based merchant banking firm ("Carlyle"), and Thomson-CSF, S.A., a diversified electronics and aerospace concern owned sixty-percent by the French government ("Thomson"), for aggregate consideration valued at approximately $450 million.
Throughout the hearings on the Application, LTV favored approval of the Vought offer, notwithstanding a disparity of some $65 million between the $450 million joint Thomson/Carlyle offer and a final competing bid of $385 million (plus certain contingent consideration) by Vought. LTV's decision to support the Vought offer was based, in large measure, on the national security risks associated with the Thomson/Carlyle offer which were not present in the Vought offer. Based upon official communications from the United States government, there was an apparent risk that Thomson, a French controlled company, would be unable to obtain the approvals necessary to perform LTVAD's defense contracts. As discussed more fully in the background section that follows, acquisitions of U.S. defense contractors by foreign companies require various governmental approvals, including approval by the U.S. Department of Defense ("DOD") and ultimately approval by the President pursuant to the Exon-Florio Amendment of the Defense Production Act of 1950.1
To assuage the concerns of interested parties, including the Pension Benefit Guaranty Corporation, LTV's single largest creditor, and ultimately win Court approval of its bid notwithstanding the apparent national security risks, Thomson agreed in open court during the bidding contest to provide a $20 million "non-refundable deposit" or "reverse break-up fee,"2 payable in the event that Thomson failed to close its agreement to purchase the missiles division assets for reasons directly or indirectly related to its inability to obtain the requisite U.S. government approvals. The reverse break-up fee agreement was embodied in section 6.06 of an asset purchase agreement dated as of April 21, 1992 between LTV and Thomson (the "Purchase Agreement").
Despite its publicly expressed confidence that it would succeed in its negotiations with the U.S. government, Thomson failed to receive the necessary governmental approvals. On July 28, 1992, Thomson announced that it regarded the Purchase Agreement as terminated, and informed LTV that it would not proceed with the closing which was then scheduled to occur on July 31, 1992. LTV entered into negotiations with other potential suitors, including Loral Corporation ("Loral"). Ultimately, orders were entered on August 20, 1992 approving various transactions pursuant to which the aircraft division assets were sold to Carlyle and the missiles division assets were sold to Loral for aggregate consideration valued at $475 million.
In the interim, LTV demanded that Thomson pay the $20 million reverse breakup fee based upon Thomson's failure to close under the Purchase Agreement. Thomson refused, and on August 3, 1992, LTV commenced this adversary proceeding against Thomson seeking, among other things, an order compelling Thomson to pay to LTV the $20 million reverse breakup fee. LTV's adversary complaint alleges that Thomson's failure to pay constitutes a breach of section 6.06 of the Purchase Agreement and this Court's April 21, 1992 order approving that agreement (the "Approval Order"). The Approval Order was affirmed by the district court and the Second Circuit Court of Appeals. See In re Chateaugay Corp., 973 F.2d 141 (2d Cir. 1992).
Thomson, for its part, denied the material allegations of LTV's complaint and filed seven counterclaims.3 Thomson alleges, inter alia, (i) that it was used as a "stalking horse" by LTV, which bitterly fought the sale of the missiles division assets of LTVAD to Thomson; and (ii) that LTV never intended to, and in fact did not, live up to its contractual and court-ordered obligations. In particular, Thomson contends that LTV failed to use reasonable efforts to consummate the transaction, as it was required to do under both the Purchase Agreement itself and the Approval Order. In addition, Thomson contends that LTV made material misrepresentations, and concealed material facts and information with respect to, inter alia, the extent to which LTVAD's revenues were derived from military contracts requiring access to a type of classified information known as "Communications Security Information" or "COMSEC." As a result, according to Thomson, it was excused from performing its obligations under the Purchase Agreement.
Before the Court are several motions with respect to the adversary proceeding commenced by LTV. LTV moves for summary judgment pursuant to Fed.R.Civ.P. 56(c), made applicable herein by Fed. R.Bankr.P. 7056, against Thomson on its first (breach of the Approval Order), second (breach of the Purchase Agreement) and third (request for turnover of the reverse brake-up fee) claims for relief. LTV also moves pursuant to Fed.R.Civ.P. 12(b)(6), made applicable herein by Fed. R.Bankr.P. 7012, for dismissal of counts two, three, four, five, six and seven of Thomson's counterclaims for failure to state a claim upon which relief may be granted. Alternatively, LTV moves pursuant to Fed.R.Civ.P. 9(b), made applicable herein by Fed.R.Bankr.P. 7009, for an order dismissing, in part, count three of Thomson's counterclaims for failure to plead fraud with particularity. Finally, LTV moves pursuant to Fed.R.Civ.P. 56(c), made applicable herein by Fed.R.Bankr.P. 7056, for an order granting summary judgment dismissing counts one through seven of Thomson's counterclaims.
According to LTV, the counterclaims asserted by Thomson are nothing more than a blatant attempt to evade its obligation to pay the $20 million reverse break-up fee, which it agreed to pay in open court and in the Purchase Agreement, and which, LTV correctly notes, was an intrinsic part of this Court's decision to approve the Thomson bid for the missiles division assets of LTVAD. Thomson, on the other hand, submits that the claims and counterclaims asserted in this adversary proceeding are interrelated and fact-intensive, and therefore poorly suited for resolution on a paper record, prior to discovery and without a trial.
After a thorough analysis of the parties' voluminous submissions and with due regard for the procedural context of the motions before the Court, the Court does not find a sufficient basis on the developed record to grant LTV's motion for summary judgment on the affirmative claims contained in its complaint and as to count one of Thomson's counterclaims. However, the Court grants LTV's motion for summary judgment on counts two and three of Thomson's counterclaims and grants LTV's motion to dismiss counts four through seven of Thomson's counterclaims. Having provided a brief introduction to the motions before the Court and the contentions of the litigants, I will describe the pertinent background facts.
On July 17, 1986 (the "Filing Date") and thereafter, LTVAD and sixty-four affiliated companies filed voluntary petitions for relief under chapter 11 of the Code. Prior to the transfer of substantially all of its assets, LTVAD, a subsidiary of The LTV Corporation, was a leading manufacturer of military and commercial aerospace and defense products.
LTVAD operated separate aircraft and missiles divisions. The aircraft division was primarily a subcontractor for military and commercial air structures and components and advanced development programs. It employed close to 10,000 people and had revenues of approximately $1.015 billion in 1991, of which 60% were derived from military subcontracts, and 40% for commercial aircraft hardware. The missiles division was primarily engaged in the design, research and development and/or production of missiles and missile related systems. It employed over 4,000 people and had revenues of approximately $750 million in 1991, of which 98% were derived directly or indirectly from military...
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