In re Hillsborough Holdings Corp., Bankruptcy No. 89-9715-8P1 to 89-9746-8P1 and 90-11977-8P1. Adv. No. 90-03

• Decision Date: 18 April 1994
• Docket Number: 90-04.,Bankruptcy No. 89-9715-8P1 to 89-9746-8P1 and 90-11977-8P1. Adv. No. 90-03
• Citation: 166 BR 461
• Parties: In re HILLSBOROUGH HOLDINGS CORPORATION, et al., Debtors. HILLSBOROUGH HOLDINGS CORPORATION, et al., Plaintiffs, v. The CELOTEX CORPORATION, et al., Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Florida

166 B.R. 461 (1994)

In re HILLSBOROUGH HOLDINGS CORPORATION, et al., Debtors HILLSBOROUGH HOLDINGS CORPORATION, et al., Plaintiffs, v. The CELOTEX CORPORATION, et al., Defendants.

Bankruptcy Nos. 89-9715-8P1 to 89-9746-8P1 and 90-11977-8P1. Adv. Nos. 90-03, 90-04.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

April 18, 1994.

Don Stichter, Stichter, Riedel, Blain & Prosser, Tampa, FL, Michael Crames, Kaye, Scholer, Fierman, Hays, New York City, for debtors.

Marsha Rydberg, Rydberg, Goldstein & Bolves, Tampa, FL, Elihu Inselbuch, Caplin & Drysdale, New York City, for defendants.

Sara Kistler, Tampa, FL, U.S. Trustee.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

ALEXANDER L. PASKAY, Chief Judge.

THIS IS an adversary proceeding commenced in these yet-to-be-confirmed Chapter 11 cases of Hillsborough Holdings Corporation (HHC), now known as Walter Industries, Inc., and its 31 wholly-owned subsidiaries (collectively referred to as the Debtors). In this connection, it should be noted that none of the Chapter 11 cases have been substantially consolidated, although procedurally the Debtors have been treated as a group as the matter involved impacts the interests of all Debtors.

In order to fully understand the role of the parties involved in this litigation, it is important to note that prior to 1987, the Debtors, together with other non-debtor entities, operated within the corporate structure of Jim Walter Corporation (JWC) acting as the holding company, owning all the stock in each of the subsidiaries, including Celotex Corporation (Celotex). In 1987, JWC was the subject of a leveraged buy-out, out of which HHC emerged as the new holding company and it is now the parent of all the subsidiaries of JWC except Celotex which was not part of the group of subsidiaries which emerged after the leveraged buy-out.

The matter under consideration was presented by a Complaint filed by the Debtors on January 2, 1990 seeking declaratory relief. In their Complaint, the Debtors named as defendants Celotex, JWC, and hundreds of individuals (collectively referred to as Asbestos Claimants) who claim to have suffered personal injuries as the result of exposure to asbestos products manufactured and distributed by Celotex.

In Count I of the Complaint, the Debtors sought a declaration that the corporate veil between Celotex and JWC cannot be pierced. In Count II of the Complaint, the Debtors sought a declaration that the leveraged buy-out of the JWC subsidiaries, which did not include Celotex, was not a fraudulent transfer. In Count III, the Debtors sought a declaration that under applicable law, they are not the successors in interest (sic) to the asbestos-related personal injury claims asserted against JWC or Celotex. In Count IV, the Debtors sought a declaration that under applicable law, they are not liable for the asbestos-related claims against either JWC or Celotex.

Extensive discovery was undertaken by both sides, and on February 28, 1992, the Debtors filed a Motion for Summary Judgment, contending that there were no genuine issues of material facts and based on the undisputed facts they presented, that they were entitled to the relief sought as a matter of law.

In due course, this Court heard argument of counsel for the respective parties, considered the extensive record relevant to the motion, and on August 25, 1992 entered an Order denying the Debtors' Motion for Summary Judgment, based upon the Court's conclusion that there were in fact genuine issues of material fact which, of course, prevented the disposition of the controversy as a matter of law. Shortly thereafter, this Court scheduled a pre-trial conference in order to prepare the remaining issues for final evidentiary hearing. On February 3, 1993, this Court entered an Order at the conclusion of the pre-trial conference, which set forth five specific issues to be tried at the final evidentiary hearing. They are as follows:

(1) whether or not during the period relevant, JWC exercised such pervasive dominant control over the affairs of Celotex which, in fact, made Celotex nothing more than a sham or an alter ego of JWC;

(2) whether or not the inter-company transactions between Celotex and JWC disregarded all hallmarks of the separateness of the legal and equitable existence of a subsidiary from its parent, that is, the operation of the cash management system, and the record-keeping activities of both entities concerning inter-company transactions;

(3) to what extent JWC was involved in the decision-making process concerning the sale of assets of Celotex;

(4) whether or not the disposition of assets of Celotex was based on a valid economic basis and was fully justified by the prevailing market conditions; and

(5) whether or not the utilization of the proceeds in fact was not repayment of valid obligations and resulted in rendering Celotex insolvent and without sufficient assets to respond to the claims of the Asbestos Claimants.

Additional discovery was allowed, but limited solely to the five (5) issues specified, and on December 13, 1993, the trial commenced on schedule. During the five days of trial, the Court received live testimony of witnesses, and received in evidence close to three thousand exhibits, including numerous charts and summaries of the testimony of the witnesses. Having received the trial transcript, and the post-trial briefs, submitted by the parties, the resolution of the five specific issues is now ripe for consideration.

Before discussing in detail the facts as established at the trial, it should be noted at the outset that, notwithstanding the formal and technical line-up of the litigants in this adversary proceeding, in which the Debtors are nominally the Plaintiffs, the party who carries the burden of proof is in reality the Asbestos Claimants, the named Defendants. In order to place these several claims and the relief sought in proper context, it should be helpful to understand the core of the controversy. The claims asserted by the Asbestos Claimants are two-fold. First, the Asbestos Claimants seek to pierce the corporate veil between Celotex and JWC, the predecessor-in-interest of HHC. Second, if the Asbestos Claimants are successful in piercing the corporate veil and then hold JWC liable to their claims already asserted against Celotex this, in turn, would, according to the Asbestos Claimants, would have rendered JWC insolvent thus the transfer accomplished through the LBO could be attacked and set aside as a fraudulent transfer. In preparing these issues for trial, this Court concluded that the veil-piercing issue was a threshold issue, and therefore, should be tried first and, only in the event the Asbestos Claimants succeed on the veil-piercing issue, will this Court consider and try the fraudulent transfer issue.

It should also be noted that the central issue in this adversary proceeding is not the liability vel non of any of these Debtors to the Claimants, since it is beyond dispute that HHC and the other debtor subsidiaries never manufactured, distributed or sold any products containing asbestos. Thus, one must focus solely on the veil piercing issue, and nothing relevant to the fraudulent transfer claim will be considered and treated by this memorandum opinion. The facts relevant to the issues outlined in the February 3, 1993 Order, as established at the evidentiary hearing, through testimony and documentary evidence are as follows:

HISTORICAL BACKGROUND

JWC was formed in 1955 as a successor to Walter Construction Company, the home building business founded by James Walter in 1946. In 1964, JWC acquired a 100% interest in Celotex Corporation, a large manufacturer of home and building materials. In 1970, JWC became the holding company of its several operating entities, in order to manage their diverse and large business activities, which included coal and marble mining, and the manufacture of gypsum board, building materials and cast iron and ductile pipe.

In April of 1972, Celotex acquired a controlling interest in The Panacon Corporation (Panacon) with a $62 million loan obtained from its parent JWC. Shortly thereafter, Celotex and Panacon merged with the unanimous written consent of the Board of Directors of Celotex and Panacon. At the time of the acquisition by Celotex, Panacon had revenues of $181.1 million, net income of $10.6 million and assets of $106 million in 1971, and employed 5500 people.

Beginning in the mid-1970's, numerous lawsuits were initiated against Panacon by parties who claim to have been injured as the result of alleged exposure to products distributed and sold by Panacon which contained asbestos. After the merger, Celotex was named as a defendant in these lawsuits. A great majority of these lawsuits alleged liability based on pre-1972 activities of Philip Carey Corporation, a predecessor-in-interest of Panacon.

Due to JWC's role as a parent of its wholly-owned subsidiaries, the members of its Board of Directors also sat on the Boards of the subsidiaries, including the Board of Celotex. In addition, JWC established a central cash management system through which JWC and its wholly-owned subsidiaries managed both payables and receivables. It is the propriety vel non of the cash management system and the alleged pervasive control by JWC over the affairs of Celotex, especially the disposition of certain assets of Celotex, which are central in the determination of the rights of the Asbestos Claimants to pierce the corporate veil of JWC.

CASH MANAGEMENT SYSTEM AND FINANCING

The cash management system for all of its wholly-owned subsidiaries, was established by JWC in the 1970's. Under this system all cash generated by the subsidiaries was transferred to the central cash management account maintained by JWC in Tampa. Payments to the subsidiaries were made directly to a depository bank account maintained by the subsidiary ("lock box"). These funds were then wire...