In re Cnb Intern., Inc.

• Decision Date: 05 September 2008
• Docket Number: Adversary No. 01-1193 B.,Bankruptcy No. 99-11240 B.
• Citation: 393 B.R. 306
• Parties: In re CNB INTERNATIONAL, INC., Debtor. CNB International, Inc. and The Official Committee of Unsecured Creditors of CNB International, Inc., Plaintiffs, v. Timothy S. Kelleher, Julie Kelleher, Kelleher & Company, Inc., Kelleher & Company LLC, Schwartz & Freeman, Northlands Inc. f/k/a Clearing-Niagara, Inc., Enprotech Corp., Enprotech Mechanical Services, Inc., EMS Parts Inc., EMS Spares Inc., Verson International Group, plc, Verson International Group, Inc., Littell International, Inc., CIT Lending Services Corporation f/k/a Newcourt Commercial Finance Corporation f/k/a AT & T Commercial Finance Corporation, Lloyds TSB Bank PLC f/k/a Lloyds Bank plc, and John Doe # 1 Through John Doe # 20, Defendants.
• Court: U.S. Bankruptcy Court — Western District of New York

393 B.R. 306

In re CNB INTERNATIONAL, INC., Debtor.

CNB International, Inc. and The Official Committee of Unsecured Creditors of CNB International, Inc., Plaintiffs, v. Timothy S. Kelleher, Julie Kelleher, Kelleher & Company, Inc., Kelleher & Company LLC, Schwartz & Freeman, Northlands Inc. f/k/a Clearing-Niagara, Inc., Enprotech Corp., Enprotech Mechanical Services, Inc., EMS Parts Inc., EMS Spares Inc., Verson International Group, plc, Verson International Group, Inc., Littell International, Inc., CIT Lending Services Corporation f/k/a Newcourt Commercial Finance Corporation f/k/a AT & T Commercial Finance Corporation, Lloyds TSB Bank PLC f/k/a Lloyds Bank plc, and John Doe # 1 Through John Doe # 20, Defendants.

Bankruptcy No. 99-11240 B.

Adversary No. 01-1193 B.

United States Bankruptcy Court, W.D. New York.

September 5, 2008.

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Kenneth Oestreicher, Esq., Gary S. Posner, Esq., Cameron J. Macdonald, Esq., Whiteford, Taylor & Preston L.L.P., Baltimore, MD, and Robert J. Feldman, Esq., Gross Shuman Brizdle & Gilfillan PC, Buffalo, NY, for the CNB International Litigation Trust.

Robert I. Bodian, Esq., David L. Barres, Esq., Francis J. Earley, Esq., Paul J. Ricotta, Esq., Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., New York, NY, for Defendant Lloyds TSB Bank plc.

DECISION & ORDER

CARL L. BUCKI, Chief Judge.

In this adversary proceeding, the plaintiffs seek to recover a fraudulent conveyance that allegedly occurred when the debtor corporation was formed through a leveraged buyout. During an intense trial of almost three weeks duration and in post-trial briefs totaling more than 400 pages in length, the parties have presented a plethora of complex legal and factual issues concerning valuation and liability. Although the court has carefully considered every argument of counsel, this written opinion will specifically discuss only those issues whose resolution will most significantly affect the decision herein.

The present controversy arises from the concluding chapter in the history of an important segment of manufacturing in Buffalo, New York. Starting in 1879, the Niagara Machine and Tool Works conducted business as a manufacturer of metal presses and tools. Over time, this company became a leader in the metal press industry. During the 1990's, however, the business became the object of two restructurings that Timothy S. Kelleher would orchestrate on behalf of a British holding company called Verson International Group plc.

Verson International Group plc ("Verson plc") is the parent of Verson International Group, Inc., a corporation established for the purpose of holding various North American acquisitions. In 1992, this subsidiary acquired Niagara Machine and Tool Works, as well as Hitachi-Zosen Clearing, Inc., a metal press manufacturer with plants in Chicago and Detroit. These two companies then merged to form Clearing-Niagara, Inc. ("Clearing-Niagara"), which consolidated operations into its Buffalo facilities. Although Clearing-Niagara would show some initial profitability, the financial needs of its parent created the motivation for further restructuring.

Since 1985, Verson plc maintained a credit relationship with Lloyds TSB Bank plc ("Lloyds Bank"), the primary defendant herein. By the summer of 1994, however, both parties realized that outstanding loans from Lloyds Bank had become significantly undersecured. To remedy this problem, Verson plc proposed to sell its North American assets through an initial public offering. Meanwhile, if it were to have any hope to implement such an offering, Verson plc would need bridge financing in the approximate amount of $10 million. Accordingly, Lloyds Bank agreed to lend this additional amount, but on condition that Verson plc recapitalize all of its outstanding credit facilities. As part of this transaction, Verson plc caused Clearing-Niagara to pledge all of its assets to Lloyds Bank. This lien held priority second only to the security interest of Marine Midland Bank. Although it provided security for the bridge financing, Clearing-Niagara received none of the proceeds from the new loan.

Due to an inability to satisfy regulatory requirements, Verson plc never finalized the initial public offering of its ownership interests in Clearing-Niagara. Instead, Verson plc resolved to pursue what the parties have labeled as the "formation transaction." At the time, Timothy Kelleher served as Chairman and Chief Executive Officer of Verson plc. Essentially, Mr. Kelleher proposed to form a new corporation for the purpose of acquiring the assets of three entities, namely Clearing-Niagara; E.W. Bliss Company; and Press Parts Plus, L.P. ("Press Parts Plus"). This new corporation became CNB International, Inc., the debtor herein.

Through the formation transaction, Timothy Kelleher sought to amalgamate three players in the metal press industry. Clearing-Niagara was primarily engaged in the manufacture of large presses with capacities between 400 and 1,500 tons. Operating in Michigan since 1857, the E.W. Bliss Company specialized in the manufacture of 30 to 400-ton presses. Press Parts Plus, L.P. was a joint venture owned equally by Clearing-Niagara and Enprotech Mechanical Services, Inc. ("Enprotech"). The assets of the joint venture consisted of exclusive licenses to use various design archives. Access to such archives would provide competitive advantages with regard to the aftermarket segment of the metal press business. The aftermarket business essentially involved the retrofitting and repair of existing machines, to enable them to serve the current needs of the owner.

The purported rationale for Kelleher's business plan had three components. First, he aimed to achieve synergies through the consolidation of new press production into a factory in Buffalo, and the consolidation of aftermarket production into a facility in Michigan. Second, his plan would gather into one company the archives of drawings for the majority of metal presses ever produced in the United States. Third, Kelleher expected to use the archives to generate high-margin aftermarket sales.

Sometime prior to October of 1996, Timothy Kelleher and his wife Julie joined with a related entity called Kelleher and Company, Inc., to form Kelleher & Company LLC, a limited liability company under Delaware law. Verson plc purchased a preferred membership interest in Kelleher & Company LLC for $10 million, and then sold that interest to Lloyds Bank for the like sum of $10 million. Indirectly, therefore, Lloyds Bank served as the source of funding for Kelleher & Company LLC. Kelleher & Company LLC then used these monies to finance part of the formation transaction.

CNB International, Inc. ("CNB" or "the debtor") was ostensibly capitalized through the sale of stock to investors for the sum of $5 million. Specifically, Kelleher and Co. LLC, paid $4,250,000 to purchase an 85 percent interest of the corporation's common stock, while other senior managers of the new corporation invested $750,000 to acquire the remaining common stock. In addition, CNB issued preferred stock to Great Banc Trust Co., for a consideration of $3,187,000. Notably, however, the majority of any equity investment derived from borrowed funds.

As is to be expected in any leveraged buyout, CNB obtained most of its funding through debt financing. Sources included a term loan in the amount of $38 million from AT & T Commercial Finance Corporation; a revolving credit facility in the amount of $25 million from Marine Midland Bank, N.A.; and a further loan of $7,313,500 from Kelleher and Co. LLC. As security for its revolving credit facility, Marine Midland Bank received a first lien with respect to all inventories, accounts, and related contracts of the newly formed entity. Meanwhile, AT & T Commercial Finance Corporation obtained a first-priority lien on all other tangible and intangible assets of CNB, and a second position with respect to the assets that CNB had already pledged to Marine Midland Bank.

The formation transaction closed on October 18, 1996, when CNB completed the acquisition of its three components. From the monies that were invested or loaned, CNB purchased the assets of E.W. Bliss Company for an adjusted cash consideration of $15,395,315, together with the assumption of various liabilities. Secondly, CNB paid the adjusted consideration of $5,984,000 for Enprotech's half interest in the assets of Press Parts Plus, again with the assumption of liabilities. The complaint in the present adversary proceeding includes claims arising from the Press Parts Plus acquisition, but those causes of action have been settled by stipulation. Rather, the outstanding dispute involves the third component of the formation transaction, namely, the acquisition of Clearing-Niagara by CNB.

As consideration for the assets of Clearing-Niagara, CNB assumed various liabilities and paid to Clearing-Niagara the sum of $43,805,838. Immediately after its receipt of these funds, Clearing-Niagara disbursed the entire amount to satisfy various obligations. In particular, it transferred two large sums to Lloyds Bank. First, it deposited $1,600,000 into a cash collateral account to secure a standby letter of credit to be used, if necessary, to pay obligations related to an employee stock ownership plan. Second, Clearing-Niagara paid to Lloyds Bank the sum of $24,385,569, which Lloyds Bank then applied against the overdraft credit facility of Verson plc. Essentially, this later payment reduced Verson's debt to Lloyds Bank by the full amount of the transfer.

After the closing of the formation transaction, CNB operated its metal press manufacturing and re-manufacturing business from facilities in Buffalo, New York, and Hastings, Michigan. Unfortunately, the company failed to achieve projected levels of sales and quickly...