In re Garrett Motion Inc. Sec. Litig.

Decision Date31 March 2022
Docket Number20 Civ. 7992 (JPC)
PartiesIN RE GARRETT MOTION INC. SECURITIES LITIGATION
CourtU.S. District Court — Southern District of New York

IN RE GARRETT MOTION INC. SECURITIES LITIGATION

No. 20 Civ. 7992 (JPC)

United States District Court, S.D. New York

March 31, 2022


OPINION AND ORDER

JOHN P. CRONAN, UNITED STATES DISTRICT JUDGE

In October 2018, Honeywell International Inc. spun off its technology and automotive division into a separate company, Garrett Motion Inc., to avoid billions of dollars in asbestos-related liability. As a result, Garrett was saddled with a $1.6 billion credit agreement and nearly $250 million in tax liabilities. To be sure, reasonable people may disagree as to the propriety of the move of spinning off a company to skirt asbestos-related liability. But that is not at issue in this case.

The first issue in this consolidated class action is whether Garrett, along with its named directors and officers (collectively, the “Garrett Defendants”), violated federal securities laws and regulations in their disclosure of Honeywell's liabilities to investors. The problem for Plaintiffs is that they have failed to adequately plead that the Garrett Defendants acted with scienter, i.e., an intent to deceive, manipulate, or defraud investors. The Court therefore grants the Garrett Defendants' motion to dismiss. But because at oral argument Plaintiffs appeared to advance a theory of liability different from what they allege in the Second Amended Complaint, the dismissal as to the Garrett Defendants is without prejudice and Plaintiffs are granted leave to amend if they so choose.

The second issue involves Plaintiffs' claims against Su Ping Lu, a former Garrett officer who played a central role in the spin-off. All of Lu's alleged misstatements occurred before the

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class period, however. A defendant is only liable for statements made during the class period. See Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir. 2007). And because Garrett fully disclosed the terms of its spin-off from Honeywell, Plaintiffs cannot show scheme liability. The Court therefore grants Lu's motion to dismiss and does so with prejudice as amendment would be futile.

I. Background[1]

A. The Parties

Lead Plaintiffs are three mutual funds managed by Gabelli Funds, LLC, and an investment manager, GAMCO Asset Management Inc. SAC ¶¶ 22-25. By the end of the class period, which runs from October 1, 2018, until September 18, 2020 (“Class Period”), Lead Plaintiffs and their affiliated entities (“Plaintiffs”) owned more than 1.1% of Garrett's common stock. Id. ¶¶ 16, 26. Plaintiffs claim to have lost more than $9.9 million from investing in Garrett securities during the Class Period. Id. ¶ 26.

Garrett is a Delaware corporation, incorporated on March 14, 2018 with its headquarters in Switzerland, and was spun-off from Honeywell on October 1, 2018. Id. ¶¶ 27, 53. Garrett

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produces and sells highly engineered turbochargers and electric-boosting and connected vehicle technologies for original equipment manufacturers (“OEMs”). Id. ¶¶ 53, 59. Given the specialized nature of Garrett's business, it regularly bids for work three-to-five years before a vehicle is manufactured. Id. ¶ 59. Garrett also sells automotive components and technologies to the automotive aftermarket-the secondary market of the automotive industry for replacement parts and products after the original sale of a car. Id. ¶ 58. Through selling aftermarket parts to distributors, Garrett provides 5, 300 part numbers and products to service garages across the world. Id.

In addition to Garrett, Plaintiffs have sued several of the company's current and former directors and officers (the “Director and Officer Defendants”):

Individual

Position

Timeframe

Olivier Rabiller

President and Chief Executive Officer (“CEO”)

Class Period

Alessandro Gili

Chief Financial Officer (“CFO”)

October 1, 2018 to September 2, 2019

Peter Bracke

Vice President and Chief Transformation Officer

June 2020 to June 2021

Interim CFO

September 5, 2019 to June 2020

Vice President for Financial Planning and Analysis and Business Finance

Before September 5, 2019

Sean Deason

CFO

June 8, 2020 to Present[2]

Russell James

Principal Accounting Officer and Controller

October 1, 2018 to Present

Carlos Cardoso

Director

October 1, 2018 to April 30, 2021

Maura Clark

Director

October 1, 2018 to April 30, 2021

Courtney Enghauser

Director

October 1, 2018 to April 30, 2021

Susan Main

Director

October 1, 2018 to April 30, 2021

Carsten Reinhardt

Director

October 1, 2018 to April 30, 2021

Scott Tozier

Director

October 1, 2018 to April 30, 2021

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Besides Garrett and the Director and Officer Defendants (collectively the “Garrett Defendants”), Plaintiffs also have sued Lu, a lawyer in Honeywell's General Counsel's office. Id. ¶ 42. Leading to the spin-off, Lu also served in many roles at Garrett and its subsidiaries, including as Garrett's President, sole board member, director, manager, and authorized signatory. Id.

B. The Spin-Off

The lengthy and complicated background of this case begins in 1939 when the Bendix Corporation started manufacturing brakes containing asbestos. Id. ¶ 43. Bendix kept using asbestos until 1983, despite knowing its dangers and the United States Environmental Protection Agency classifying asbestos as a human carcinogen in 1971. Id.

On April 1, 1985, Bendix merged into Allied Corporation, which later merged into AlliedSignal Inc. Id. ¶ 44. On December 4, 1999, AlliedSignal Inc. merged with Honeywell Inc. Id. As part of the merger, Honeywell Inc. ceased to exist as a legal entity and AlliedSignal Inc. changed its name to Honeywell International Inc. (“Honeywell”). Id.

Honeywell has faced significant liability from the Bendix asbestos-related claims. Id. ¶ 45. For instance, the Second Amended Complaint alleges that Honeywell estimated in its 2004 annual report that “it resolved 71, 000 Bendix-related asbestos claims from 1981 through 2004.” Id. But despite resolving so many claims, Honeywell estimated that it was still facing over 20, 000 unresolved claims as of 2012. Id. And Honeywell estimated that, as of December 31, 2017, these asbestos-related liabilities were projected to cost the company $1.7 billion through 2059. Id. ¶ 46.

Discontent with holding so much liability, Honeywell began trying to offload its Bendix-related asbestos liability. Id. ¶ 72. In 2003, Honeywell tried to sell its “Friction Materials and Bendix business to bankrupt Federal-Mogul Corporation in exchange for a permanent channeling injunction requiring all asbestos-related claims to be submitted to a Bendix trust established by

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Federal-Mogul.” Id. But this early attempt to offload the asbestos liability failed after “General Motors, Ford and Daimler Chrysler successfully sued to block the Honeywell/Federal-Mogul transaction as a fraudulent transfer.” Id.

Then in 2017, facing increasing pressure from shareholders to improve performance, Honeywell sought to simplify its portfolio by disposing of underperforming assets through spin-offs and divestitures. Id. ¶¶ 47, 49-52. After reviewing its businesses, Honeywell chose to spin off its Transportation Systems business, which would become Garrett. Id. ¶ 52.

To facilitate the spin-off, Honeywell incorporated Garrett in Delaware as a wholly-owned subsidiary. Id. ¶ 53. Honeywell then appointed its in-house counsel, Lu, to serve as Garrett's President and lone board member during the spin-off negotiations. Id. ¶¶ 62-63. Lu would keep this role throughout the spin-off negotiations, resigning on September 30, 2018-one day before the spin-off closed, Garrett's stock began publicly trading, and the Class Period began. Id. ¶ 108.

Besides sharing Lu's representation, Garrett and Honeywell used the same law firm and the same financial advisor. Id. ¶ 64. Garrett would later claim that the law firm “blindly acceded to Honeywell's wishes, regardless of the best interest of” Garrett, and that the financial advisor was “hopelessly conflicted” during the spin-off negotiations. Id. ¶¶ 64, 66.

As part of the spin-off, Garrett took on liabilities and restrictions pursuant to a Separation Agreement, an Indemnification Agreement, a Credit Agreement, and a Tax Matters Agreement (collectively, the “Honeywell Obligations”). Id. ¶¶ 72-91. The Separation Agreement “detailed the transfer of assets and assumption of liabilities” post-spin-off, described the spin-off steps, released Honeywell from certain claims, excluded liabilities from certain contracts including the Indemnification Agreement, and specified how Garrett's common stock would be distributed. Id. ¶ 76. It also explained who represented Garrett and Honeywell during the spin-off:

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[L]egal and other professional services that have been and will be provided prior to the [spin-off] (whether by outside counsel, in-house counsel or other legal professionals) have been and will be rendered for the collective benefit of each of the members of the Honeywell Group and [Garrett], and each of the members of the Honeywell Group and [Garrett] shall be deemed to be the client with respect to such services for the purposes of asserting all privileges which may be asserted under applicable Law in connection therewith.

Id. ¶ 74. While the Separation Agreement was not executed until September 27, 2018, Garrett's board approved it three weeks beforehand after Lu found it “advisable and in the best interests of [Garrett]” based on an August 23, 2018 draft. Id. ¶ 75.

The Indemnification Agreement encumbered Garrett with 90% of Honeywell's Bendix-related liabilities in the United States and required Garrett to pay other liabilities, up to $175 million yearly. Id. ¶...

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