In re Healthco Intern., Inc., Bankruptcy No. 93-41604-JFQ. Adv. No. 95-4154.
| Decision Date | 17 May 1996 |
| Docket Number | Bankruptcy No. 93-41604-JFQ. Adv. No. 95-4154. |
| Citation | 195 BR 971 |
| Parties | In re HEALTHCO INTERNATIONAL, INC., Debtor. William A. BRANDT, Jr., Trustee, Plaintiff, v. HICKS, MUSE & CO., INCORPORATED, et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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J. Joseph Bainton, Jose Baez, Ross & Hardies, New York City, Michael A. Khoury, Cohn & Kelakos, Boston, MA, for William A. Brandt, Trustee.
Thomas G. Rafferty, Cravath, Swaine & Moore, New York City, Arnold P. Messing, Choate, Hall & Stuart, Boston, MA, for Lazard Freres & Co.
Mark N. Parry, Moses & Singer, New York City, for Gemini Partners, Arthur M. Goldberg.
Mark K. Schonfeld, Testa, Hurwitz & Thibeault, Boston, MA, for Wand Partners, Mercury Asset Management, Life Partners Group.
David C. Fixler, Rubin & Rudman, Boston, MA, for Robert Casey, Helen Cyker.
Andrew A. Kress, Cherise Wolas Kasica, Arthur Steinberg, Kaye, Scholer, Fierman, Hays & Handler, New York City, for Kaye, Scholer, Fierman, Hays & Handler.
Edwin G. Schallert, Debevoise & Plimpton, New York City, for Chancellor Trust Co., Chancellor Capital Management.
David A. Parke, Bulkley, Richardson & Gelinas, Springfield, MA, for Cramer, Rosenthal, McGlynn.
H. Bissell Carey, III, John E. Tener, Robinson & Cole, Boston, MA, Joseph L. Clasen, Robinson & Cole, Stamford, CT, for Chrysler Capital Corp.
Dennis E. Glazer, Matthew Gluck, Davis, Polk & Wardwell, New York City, for J.P. Morgan.
Gary L. Weiner, Fried, Frank, Harris, Shriver & Jacobson, New York City, for Vincent A. Mai, Thomas L. Kempner.
Hugh J. Gorman, III, Hinckley, Allen, Snyder & Comen, Boston, MA, for Joel Lewin.
Christopher T. Vrountas, Cooke, Clancy & Gruenthal, Boston, MA, for Marvin Cyker.
Peter T. Wechsler, Warner & Stackpole, Boston, MA, for Freshfields, Nabarro Nathanson.
Louis Goodman, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, for Skadden, Arps, Slate, Meagher & Flom.
Darragh Kasakoff, Seder & Chandler, Worcester, MA, for Richards, Layton & Finger Martineau Walker.
Robert Seder, Seder & Chandler, Worcester, MA, for Weil, Gotshal & Manges.
James F. Wallack, Goulston & Storrs, Boston, MA, for Morgan Stanley & Co.
Nancy Lazar, Davis, Polk & Wardwell, New York City, for J.P. Morgan & Co., Inc.
Mark D. Cress, Bulkley, Richardson & Gelinas, Springfield, MA, for Cramer, Rosenthal, McGlynn.
Kathleen Donius, Michael Jankowski, Reinhart, Boerner, Van Deuren, Norris & Rieselback, Milwaukee, WI, for Valuation Research Corp.
Vincent Amoroso, Parker, Coulter, Daley & White, Boston, MA, for Robert Mulcahy, III.
Timothy C. Blank, Dechert, Price & Rhoads, Boston, MA, for Bar & Karrer.
John Gilmore, Hill & Barlow, Boston, MA, for `The Airlie Group'.
Phillip N. Smith Jr., Jeffrey A. Carter, Robert Elkin, Scott R. Jacobs, Mike McKool, Jr., Michael A. Piazza and Melanie G. Cowart, McKool Smith, PC, Dallas, TX, for `The Hicks, Muse Group'.
Steven M. Pesner, Akin, Gump, Strauss, Hauer & Feld, New York City, for `The Apollo Group'.
Christian M. Hoffman, Foley, Hoag & Eliot, Boston, MA, for Coopers & Lybrand.
William J. Hanlon, Goldstein & Manello, PC, Boston, MA, for Conseco.
Daniel J. Lyne, Hanify & King, Boston, MA, for Ray Doherty.
This is yet another case of a leveraged buyout gone sour. In May of 1991, management of Healthco International, Inc. ("Healthco") escaped from a proxy contest by causing all the company's capital stock to be sold to a "white knight" in a leveraged buyout (the "LBO"). Healthco filed a chapter 11 petition with this court on June 9, 1993. The case was soon converted to chapter 7.
William A. Brandt, Jr., the chapter 7 trustee (the "Trustee"), brings this complaint against sixty-five defendants and the entire class of selling stockholders, virtually everyone who had anything to do with the LBO. In addition to the selling shareholders, the defendants are the buyer, financing banks, debenture holders, directors, officers, controlling shareholders, financial advisors, lawyers and accountants. The complaint contains 22 counts. It includes causes of action based upon fraudulent transfer law, statutory law governing shareholder distributions, principles of unjust enrichment, fiduciary obligations of directors and controlling shareholders, breach of contract, negligence, gross negligence and bad faith. Since the complaint's filing, the Trustee has negotiated a $10 million settlement with the financing banks. I have previously dismissed as to certain selling shareholders the counts for fraudulent transfers and excessive shareholder distributions. I did so because the payments to these shareholders were made by the buyer rather than by Healthco.
Now before me are two motions to dismiss, one by Lazard Freres & Co., Inc. ("Lazard"), Healthco's financial advisor, and the other by Gemini Partners, L.P. ("Gemini") and Arthur M. Goldberg ("Goldberg"). Gemini is the Healthco shareholder who initiated the proxy contest that precipitated the LBO; Goldberg was a director of Healthco and is Gemini's controlling shareholder. Both motions are based on Rule 7012(b)(6) of the Federal Rules of Bankruptcy Procedure, asserting the complaint fails "to state a claim upon which relief can be granted. . . ."1 Gemini also seeks to dismiss the complaint under Rule 7009(b), which provides that "circumstances constituting fraud . . . shall be stated with particularity".2 In addition, the motions present matters not referred to in the complaint. Lazard relies in part upon the wording of its engagement agreement with Healthco. Gemini and Goldberg point to Gemini's settlement agreement with Healthco. To the extent the motions are based on these documents, I treat them as motions for summary judgment.3
Because the movants contend the complaint states no claim against them, I construe the complaint in the light most favorable to the Trustee, and I take its allegations to be true.4 The uncontested documents relied upon by the movants are also taken at face value.
The Trustee paints a lurid picture of greed and breach of duty causing the collapse of a sizeable company, with attendant injury to creditors and employees. Prior to its demise, Healthco was a major distributor of dental supplies, equipment and services to providers of dental care throughout the United States, Canada and Western Europe. It was incorporated under the laws of Delaware and had its principal office in Massachusetts. Healthco's capital stock was traded over the counter and quoted on the NASDAQ Market System. Although the company had been successful in the past, its more recent earnings record left management vulnerable. In 1989, Healthco lost $21.887 million, which included a nonrecurring charge of $29.694 million for the cost of restructuring its distribution system.
On May 3, 1990, Gemini publicly disclosed that it owned 9.96% of the outstanding shares of Healthco. It soon commenced a proxy contest to remove the incumbent board. Facing a threat to their employment and a likely decline in the value of their stockholdings, members of Healthco's top management were eager to cash out. Healthco retained Lazard, a New York investment banker, on June 18, 1990. In Lazard's letter agreement fixing the terms of the engagement, Lazard promised Healthco it would "consider the appropriateness of various financial and acquisition alternatives which may merit consideration" and would "be available to evaluate any transaction in which Healthco is a participant, including without limitation any . . . leveraged buyout." Lazard stated it had "become familiar over a period of time with Healthco's business" and that the engagement would "enable" it "to approach various situations not simply on a transactional basis but rather from a longtime perspective. . . ." Lazard was retained as Healthco's "exclusive representative with respect to the foregoing" for one year. The letter agreement makes no mention of any future "fairness" opinion. Lazard's compensation was largely dependent upon a sale of Healthco taking place within the agreement's one-year period, or within six months thereafter as a result of discussions in which it participated. Its fee was to be 1% of the sales price, payable in cash, against which a $250,000 initial "financial advisory fee" was to be credited.
Lazard then searched for a "white knight" who would rescue management from the looming proxy contest. It held discussions with about fifty potential buyers, soon centering its efforts on the eventual buyer, Hicks, Muse & Co., Incorporated ("Hicks, Muse"). Hicks, Muse is a Dallas-based investment banking firm established in 1989 which specialized in leveraged buyouts.
On September 4, 1990, pursuant to board approval, Healthco executed a merger agreement with HMD Acquisition Corp. ("HMD Acquisition"), which Hicks, Muse had organized on August 31, 1990 solely for the purpose of effecting the LBO. HMD Acquisition was a wholly-owned subsidiary of HMD Holding Co., Inc. ("HMD Holding"), organized by Hicks, Muse on the same day for the same purpose. The merger agreement contemplated the sale or cancellation of all Healthco's outstanding capital stock through a two-step process. HMD Acquisition was first to make a tender offer for the shares at a cash price of $19.25 per share. Next, through the merger, shareholders who did not accept the tender offer were to have their stock cancelled and be paid a $19.25 per share cash price. Consummation of the merger was conditioned upon various events, including Hicks, Muse obtaining financing for the transaction and Healthco's auditors certifying financial statements for the twelve months ended December 29, 1990 which showed earnings before interest, taxes, depreciation and amortization ("EBITDA") of not less than $38 million.
With a merger partner in hand, Healthco's management next negotiated a settlement...
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