In re Hillsborough Holdings Corp.
| Decision Date | 13 October 1994 |
| Docket Number | 90-0004.,No. 94-889-CIV-T-21C. Bankruptcy No. 89-9715-8P1 to 89-9746-8P1 and 90-11997-8P1. Adv. No. 90-0003,94-889-CIV-T-21C. Bankruptcy No. 89-9715-8P1 to 89-9746-8P1 and 90-11997-8P1. Adv. No. 90-0003 |
| Citation | 176 BR 223 |
| Parties | In re HILLSBOROUGH HOLDINGS CORPORATION, et al., Debtors. The CELOTEX CORPORATION, et al., Appellants, v. HILLSBOROUGH HOLDINGS CORPORATION, et al., Appellees. |
| Court | U.S. District Court — Middle District of Florida |
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Marsha G. Rydberg, Rydberg, Goldstein & Bolves, P.A., Tampa, FL, Trevor W. Swett, Caplin & Drysdale, Washington, DC, for appellants.
Charles E. Koob, Simpson, Thacher & Bartlett, New York City, Don Mason Stichter, Stichter, Riedel, Blain & Prosser, P.A., Tampa, FL, for Hillsborough Holdings Corp.
Jeffrey W. Warren, Bush, Ross, Gardner, Warren & Rudy, P.A., Tampa, FL, for Celotex Corp.
Michael Byrley Colgan, Hoyt, Colgan & Andreu, P.A., Tampa, FL, for Jim Walter Corp.
Charles E. Koob, Simpson, Thacher & Bartlett, New York City, Don Mason Stichter, Stichter, Riedel, Blain & Prosser, P.A., Tampa, FL, for Walter Industries.
This is an appeal by the Celotex Corporation, various Asbestos Claimants, and the Jim Walter Corporation, from a final judgment entered by Judge Alexander L. Paskay of the United States Bankruptcy Court, Middle District of Florida, in an adversary proceeding arising from the non-consolidated Chapter 11 reorganizations of Hillsborough Holdings Corporation, now called Walter Industries, Inc., and its 31 wholly-owned subsidiaries. In re Hillsborough Holdings Corp., 166 B.R. 461 (Bankr.M.D.Fla.1994). Appellants, Defendants in the adversary action below, include a group known as the asbestos claimants, individuals who have suffered personal injury and property damage from asbestos products. Appellants also include Celotex Corporation ("Celotex") and Jim Walter Corporation, the sole shareholder of Celotex. Appellees, Plaintiffs and Debtors in the adversary case below, are Hillsborough Holdings Corporation ("HHC"), now known as Walter Industries, Inc. ("Walter Industries"), and its 31 wholly-owned subsidiaries.
Prior to 1987, the old Jim Walter Corporation ("JWC") acted as a holding company, owning all the stock in various subsidiaries, including Celotex. In 1987, JWC was the subject of a multi-step leveraged buy-out (the "LBO"), in which JWC was acquired by and merged into a newly formed corporation called Hillsborough Acquisition Corporation ("HAC"). HAC then transferred all of JWC's assets, except Celotex, to two newly-created holding companies, HHC and Walter Industries. HAC next changed its name to Jim Walter Corporation. HHC sold this "new" Jim Walter Corporation, along with its subsidiary Celotex, to a third party, the Jasper Corporation. Although this "new" Jim Walter Corporation is an Appellant in this case, this Court's discussions of the issues on appeal primarily concern conduct of the "old" JWC, as it existed prior to the LBO.
JWC was incorporated in 1955 to engage in the home construction business. JWC acquired the Celotex Corporation in 1964. At that time, Celotex was a large manufacturer of home building materials. Throughout the years, Celotex acquired various divisions and subsidiaries. JWC also acquired various other businesses, and in 1970, JWC became a holding company to manage its diverse business activities. In 1972, Celotex obtained a controlling interest in The Panacon Corporation ("Panacon"), a distributor of asbestos products, utilizing a $62 million advance from JWC to obtain this interest. Soon thereafter, Panacon merged with Celotex. Following the merger, Celotex was named as a defendant in numerous lawsuits instituted against Panacon prior to the merger.
Between 1972 and 1987, as asbestos litigation increased generally, Celotex became a defendant in an increasing number of actions. From 1973 to 1981, the number of plaintiffs commencing suit against Celotex doubled each year. In 1982, lawsuits against Celotex numbered 15,100; in 1983 lawsuits increased to 20,100; in 1984 that number increased to 25,600; and in 1985, the number of lawsuits reached 34,900. During this time, JWC and Celotex management knew of the number of lawsuits pending against Celotex, knew of the costs of settlements made in various lawsuits, and were informed of the prospects of then-pending litigation.
The adversary action raised numerous issues concerning the intercorporate relationship between Celotex and JWC. It is undisputed that the members of JWC's board of directors also sat on the boards of JWC's subsidiaries, including Celotex. Celotex's board of directors met face-to-face on only a few occasions. Instead, they took actions, including action concerning the disposition of various assets, by written consent of the board members. Celotex had full control over the hiring and firing of employees and management of its payroll. Celotex kept individual accounting records and maintained independent corporate minute books. Celotex had both "core" and "non-core" businesses. Each of the core businesses was included in one of three divisions: Building Products, Industrial Products, or Roofing Products.
JWC, as part of its management structure, had five group vice presidents, responsible for specific areas of JWC's business. JWC's various subsidiaries, including Celotex, reported not only to subsidiary management, but to the group vice president in charge of the subsidiaries' respective line of business. Additionally, the heads of Celotex's "non-core" subsidiaries reported directly to that group vice president in charge of its area of business. JWC's management actively participated in its subsidiaries' long-term business planning, including the acquisition, transfer and disposition of various assets. However, JWC played no part in the day-to-day operations of its subsidiaries.
In the 1970s, JWC established a cash management system for all of its wholly-owned subsidiaries. Under such system, cash generated by the subsidiaries was transferred to a centralized cash management account maintained by JWC. Customers of JWC's various subsidiaries made payments directly to those subsidiaries. The subsidiaries would place those checks in a bank account maintained by the subsidiary, referred to as a depository transfer account, or "lock box." That same day, or the following day, funds deposited in that account were transferred to a concentration account maintained by JWC. Celotex maintained records of all funds placed in the lock box, and was credited for those funds. JWC's cash management system was comprised primarily of two accounts for each of its subsidiaries, the 501 account and 502 account. Within the cash management system, each subsidiary maintained a "zero balance disbursement account," from which Celotex paid its trade creditors and operating expenses. At the end of each day, the bank would advise JWC of the amount of checks presented to the subsidiary's zero balance account for payment, and JWC would transfer funds from the concentration bank account to cover the checks written. JWC maintained daily cash sheets, and an accounting of funds disbursed by each subsidiary. The 501 account included postings of all deposits and disbursements going through the cash management system. The 502 account reflected those funds received directly by JWC on behalf of a subsidiary. JWC would notify its subsidiary of any transfer directly to the 502 account, on its behalf, through an advice on interdivision charge or credit, and each subsidiary got credit for these funds. The 502 account also reflected a receivable. Each of JWC's subsidiaries had its own accounting department, and each subsidiary received monthly statements for the 501 and 502 accounts.
The 502 account also reflected loans made by JWC to its subsidiaries. JWC obtained funds from outside lenders and made those funds available to subsidiaries. The practice of obtaining large loans for use by all subsidiaries proved economically beneficial to the subsidiaries, as they could obtain funds at a significantly lower rate of interest and without various restrictions accompanying the loans. The intercorporate advances were never formalized with loan documents or promissory notes. The advances were recorded in the 502 account as "intercompany payables," and were represented as such in various financial reports. When excess funds remained in the JWC's concentration account, JWC utilized those funds to make payments on loans obtained by JWC from outside lenders.
JWC provided various services to its subsidiaries, including legal services, human resources services, accounting and tax service, and investment advisement services. JWC charged each subsidiary for these services through an intercorporate assessment. The assessment also reflected the costs incurred by JWC in obtaining loans and making those funds available to subsidiaries. Each subsidiary's assessment was based upon a portion of the projections of net assets employed by the subsidiary. When the assessment exceeded or was less than the estimate charged, the subsidiary was credited or debited the appropriate amount. The assessment due from the subsidiary to JWC was also included as part of the "intercompany payable" on JWC's financial statements.
From 1981 to 1987, Celotex disposed of various subsidiaries and divisions in conjunction with a cost-cutting plan implemented by JWC and its subsidiaries. The cost-cutting plan was initiated in response to the recession of the early 1980s. The recession, causing high interest rates and inflation, proved significantly detrimental to JWC's businesses. The demand for new housing fell, thus decreasing JWC's sales of home building products. The increasing interest rates further affected the various loans obtained by JWC from outside lenders, as these loans had adjustable interest or floating interest rates.
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