In re Grumman Olson Industries, Inc.
| Decision Date | 25 August 2005 |
| Docket Number | Adversary No. 04-4711.,Bankruptcy No. 02-16131 (SMB). |
| Citation | 329 B.R. 411 |
| Parties | In re GRUMMAN OLSON INDUSTRIES, INC., Debtor. Official Committee of Unsecured Creditors of Grumman Olson Industries, Inc., Plaintiff, v. James A. McConnell, H.I.G. Capital LLC, and Specialized Vehicles Corporation, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Hahn & Hessen, LLP, Mark T. Power, Esq., of Counsel, New York, NY, Attorneys for Official Committee of Unsecured Creditors of Grumman Olson Industries, Inc.
Sommer Barnard Attorneys, PC, Paul T. Deignan, Esq., of Counsel, Indianapolis, IN, Scarcella Rosen & Slome, LLP, Alan Marder, Esq., of Counsel, Uniondale, NY, Attorneys for James A. McConnell.
Brown Raysman Millstein Felder & Steiner, LLP, Bruce J. Zabarauskas, Esq., of Counsel, New York, NY, Kluger, Peretz, Kaplan & Berlin, P.L., Jason S. Oletsky, Esq., of Counsel, Miami, FL, Attorneys for H.I.G. Capital, LLC and Specialized Vehicles Corporation, Inc.
OPINION GRANTING IN PART AND DENYING IN PART
MOTION TO DISMISS AND DENYING MOTION TO CHANGE VENUE
The Official Committee of Unsecured Creditors (the "Committee") of Grumman Olson Industries, Inc. ("Grumman") commenced this adversary proceeding as the estate representative to recover damages arising in connection with an aborted purchase of Grumman's assets by H.I.G. Capital, LLC ("HIG") and Specialized Vehicles Corp. ("SVC," and together with HIG, "HIG/SVC"). The third defendant, James McConnell, was Grumman's former president and chief executive officer. The Committee's claims center on the notion that HIG/SVC bribed McConnell to sell Grumman "on the cheap."
HIG/SVC have moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the three claims — breach of fiduciary duty, aiding and abetting breach of fiduciary duty and tortious interference with contract — lodged against them in the Amended Complaint. McConnell has moved pursuant to 28 U.S.C. §§ 1406 and 1409 and Fed.R.Civ.P. 12(b)(3) to dismiss the various avoidance and common law claims alleged against him based on improper venue, or alternatively, to transfer venue to the Western District of Michigan. For the reasons that follow, HIG/SVC's motion to dismiss the aiding and abetting and tortious interference claims is granted based upon the Committee's lack of standing, and the motions, including McConnell's venue motion, are otherwise denied.
The background information for this portion of the decision is based on the allegations in the Plaintiff's Amended Adversary Proceeding Complaint ("Amended Complaint"), dated April 7, 2005, as well as certain documents referred to, relied on and sometimes quoted from by the Committee. These include an Employment Agreement, a Letter of Intent, and a Consulting Agreement discussed below.1 The well-pleaded allegations are deemed to be true for the purposes of HIG/SVC's motion to dismiss.2
At all relevant times, Grumman was a manufacturer and designer of truck bodies. (Amended Complaint, ¶ 13.) Grumman was incorporated in New York, maintained its principal office in Michigan, and conducted significant operations in Pennsylvania and California. (Id., ¶ 7.) In addition, it owned a plant in Georgia that it operated until September 2002. (Id.)
Prior to 1997, Grumman was a wholly-owned subsidiary of Northrop Grumman. In December of that year, Olson Holdings, LLC ("Holdings"), an Indiana limited liability company, acquired 100% of the common stock of Grumman through a management-led buyout. (Id., ¶¶ 8, 14.) The members of Holdings were the key senior management of Grumman at the time of the buyout. McConnell held a 55.3% membership interest in Holdings, and was the majority and controlling member. (Id., ¶¶ 14, 16.) Ten other members held the remaining 44.7%. (See id., ¶ 14.)
Following the buyout, McConnell entered into an Executive Stock Agreement, dated December 11, 1997 (the "Employment Agreement") with Grumman, and became its president and chief executive officer, as well as a director. (Id., ¶ 17.) McConnell bound himself to "devote his full time, attention, skill and efforts to" Grumman's operations and not "engage in any other business activity requiring any substantial amount of his time." (Employment Agreement, Art. II; Amended Complaint, ¶ 18.) In addition, McConnell agreed to hold information relating to Grumman's business including, inter alia, Grumman's financial information, in strict confidence. (Employment Agreement, Art. VIII; Amended Complaint, ¶ 19.) Grumman covenanted to pay McConnell an annual salary of $189,375. (Employment Agreement, Art. III.) In the event of a sale of Grumman and the termination of McConnell's employment, he became entitled to receive a "golden parachute," consisting of two years of full salary plus one additional year's bonus. (Id., Art. V; Amended Complaint, ¶ 29.)
Grumman started to experience financial losses in 1999. (Amended Complaint, ¶ 20.) By the end of 2001, it faced significant liquidity problems, (id., ¶ 21), and defaulted on a revolving credit facility with its secured lender. (Id., ¶¶ 15, 21.) By early 2002, Grumman's board of directors decided that Grumman had to be sold. (Id., ¶ 26.) Following this decision, McConnell, along with David Paritz, an advisor to the board, and Thomas Murphy, an accounting partner who was functioning as a de facto chief financial officer, approached various potential purchasers of Grumman's business. (Id., ¶¶ 23, 27.) Upon information and belief, McConnell discussed the decision to sell with Transamerica Business Capital Corporation, Grumman's secured creditor, and Transamerica supplied McConnell with a list of potential buyers who McConnell thereafter contacted. (Id., ¶ 28.)
McConnell realized that none of the members of Holdings, including himself, would recover their equity in the event of a sale. (Id., ¶ 29.) Upon information and belief, McConnell also realized that he would not be able to collect his "golden parachute" if Grumman was forced to file a bankruptcy petition. (Id.) Upon information and belief, to ensure that he received comparable benefits, "McConnell embarked on a plan whereby he attempted to control the marketing and sales process of the Debtor in order to extract a significant payment or other consideration for himself from a prospective suitor before he would agree to commit the Debtor to accept an offer from such suitor." (Id., ¶ 30.) Toward this end, and again on information and belief, McConnell elected to manage the sales process by himself, without the aid of a reputable investment banking firm, although he received "some assistance" from Murphy and Paritz. Upon information and belief, he avoided potential buyers, despite their strategic interest and financial ability to consummate a purchase, because he thought they would not offer him a separate side agreement. Finally, upon information and belief, McConnell advised interested parties that they had to compensate him personally to obtain his support for any agreement to sell Grumman. (Id., ¶ 31.)
During this time period, HIG/SVC became interested in acquiring Grumman.3 (Id., ¶ 34.) Earlier, they had bought other companies at bankruptcy auctions, and as a result of the competitive bid process, were forced to bid more than their initial offers. (Id., ¶ 32-33.) Upon information and belief, HIG/SVC enlisted McConnell's support for a private sale of Grumman by offering to compensate him (the "Private Sale Premium") directly through a consulting arrangement even though they did not value and had little use for McConnell's consulting services. (Id., ¶ 36.)
The Amended Complaint alleges a scheme through which HIG/SVC bought off McConnell and acquired complete domination and control over both sides of the deal. First,4 HIG signed a letter of intent with Grumman, dated September 17, 2002 (the "Letter of Intent"), to purchase Grumman's business. (Id., ¶ 37.) McConnell signed the Letter of Intent on Grumman's behalf as its president and CEO. Grumman agreed, among other things, not to engage in transactions outside of the ordinary course of business without HIG/SVC's written consent, (Letter of Intent, § 4) and consented to a "no shop/no talk" clause — it would not solicit any other offers, entertain any unsolicited offers, negotiate with other potential buyers or respond to their inquiries. (Id., § 8.) Afterwards, McConnell never solicited or pursued other options to sell Grumman's business. (Amended Complaint, ¶ 49.)
Second, on the same day, HIG/SVC and McConnell entered into side agreements (the "Side Agreements") that benefitted the parties at Grumman's expense. (Id., ¶ 38.) McConnell agreed to assist and guide SVC's management "with respect to strategic decisions needed from time to time including in connection with, among other things, the acquisition of [Grumman] currently being undertaken by [SVC]." (Consulting Agreement, § 3.) During the first 90 days, he promised to devote up to 20 hours each week to the consulting services, and thereafter, "to generally be available." (Id.) He was to work under the supervision of SVC's board of directors. (Id., § 4.)
SVC undertook to pay McConnell an annual consulting fee of $200,000, or a total of $400,000, (Id., § 6(a).) In addition, McConnell was eligible to receive an annual bonus of up to 50% of the consulting fee, or potentially $200,000 over the life of the Consulting Agreement. (Id., § 6(b).) Furthermore, to the extent that McConnell was not "otherwise" receiving certain benefits and perquisites, SVC promised to provide medical insurance, an automobile allowance of $1,200, country club dues up to $600 per month and airport club membership fees up to $500 per month. (Id., §...
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