In re McCook Metals, LLC

• Decision Date: 14 January 2005
• Docket Number: 03 A 02140,01 B 27329 Adversary Nos.02 A 00790,Bankruptcy No. 01 B 27326
• Citation: 319 B.R. 570
• Parties: In re McCOOK METALS, L.L.C. and McCook Equipment, L.L.C., Debtors. Joseph Baldi, as Chapter 11 Trustee of McCook Metals, L.L.C., Plaintiff, v. Micheal Lynch, John Kolleng, Matthew Ochalski, James McCook, McColl Enterprises, L.L.C, and Longview Aluminum, L.L.C, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

319 B.R. 570

In re McCOOK METALS, L.L.C. and McCook Equipment, L.L.C., Debtors.

Joseph Baldi, as Chapter 11 Trustee of McCook Metals, L.L.C., Plaintiff, v. Micheal Lynch, John Kolleng, Matthew Ochalski, James McCook, McColl Enterprises, L.L.C, and Longview Aluminum, L.L.C, Defendants.

Bankruptcy Nos. 01 B 27326, 01 B 27329 Adversary Nos.02 A 00790, 03 A 02140

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

January 14, 2005.

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Robert M. Fishman, Jeffrey Widman, George J. Spathis, Shaw, Gussis, Fishman, Glantz, Wolfson & Towbin LLC, Chicago, IL, for trustee.

Michael Duffy, Roy R. Brandys, Childress & Zdeb, Ltd., Chicago, IL, for Michael Lynch.

MEMORANDUM OF DECISION

EUGENE R. WEDOFF, Chief Judge.

These two adversary proceedings, arising in the bankruptcy of McCook Metals, L.L.C., are before the Court for judgment after a joint trial. The proceedings were brought by Joseph Baldi, the bankruptcy trustee, against a number of parties, including Michael Lynch. The trustee settled his claims against the other defendants, so that only Lynch was involved in the trial. Both of the adversaries allege an improper transfer of the debtor's right to purchase an aluminum smelter, but they seek different relief. The first adversary, No. 02 A 790 (the "2002 Adversary"), seeks monetary damages under several theories:

Counts I through III make fraudulent transfer claims. Counts I and II seek avoidance of transfers under § 548 of the Bankruptcy Code (Title 11 U.S.C.) and § 5 of the Illinois Uniform Fraudulent Transfer Act, 740 ILCS 160/5. Count III seeks an award of the value of the property involved in the transfers, pursuant to § 550(a) of the Code.

Count IV sets out a claim for common law conversion.

Count V sets out a claim for common law breach of fiduciary duty.

The second adversary proceeding, No. 03 A 2140 (the "2003 Adversary"), addresses claims made by Lynch against the debtor's estate, seeking disallowance (Count I) or equitable subordination (Count II) pursuant to §§ 502(d) and 510(c) of the Bankruptcy Code.

As discussed below, with respect to the 2002 Adversary, the trustee is entitled to judgment against Lynch in the amount of $2,744,000 on Counts I through III, and, alternatively, to judgment in the amount of $1,637,993 on Count V; Lynch is entitled to judgment on Count IV. With respect to the 2003 Adversary, Lynch's claims are disallowed pending his payment of the judgment on Counts I through III of the 2002 Adversary; however, any subsequently allowed claim by Lynch against the estate will not be equitably subordinated.

Jurisdiction

Under 28 U.S.C. § 1334(a), the district courts have exclusive jurisdiction over bankruptcy cases. Pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred its bankruptcy cases to the bankruptcy court of this district. When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. The pending adversaries are core proceedings under 28 U.S.C. § 157(b)(2)(B) (allowance or disallowance of claims against the estate); (C) (counterclaims by the estate against persons filing claims against the estate); and (H) (proceedings to determine, avoid, or recover fraudulent conveyances). This court may therefore enter final judgments in these adversaries.

Findings of Fact

A. Michael Lynch and McCook Metals, L.L.C.

Michael Lynch is an entrepreneur whose career began in real estate and developed into the ownership and management of troubled business. (Tr. Vol. Ill at 8-20.)¹ His experience, as well as his demeanor as a witness, establishes him as a knowledgeable, articulate, and persuasive investor and manager.

In the course of his career, Lynch founded Michigan Avenue Partners, LLC ("MAP"). (Tr. Vol. Ill at 10-12.) Originally, MAP was in the business of acquiring financially distressed real estate (Tr. Vol. Ill at 15), but it eventually began acquiring distressed businesses. (Tr. Vol. Ill at 19-20, 35-36.) In October of 1997, Lynch was approached by Reynolds Metals Company ("Reynolds") regarding the possibility of MAP acquiring an aluminum processing plant owned by Reynolds in McCook, Illinois. (Tr. Vol. Ill at 16-17.) The McCook plant had been supplying aluminum sheet to the automobile industry and was losing money. (Tr. Vol. Ill at 21; D. Ex. 54.) Lynch believed that the McCook plant could return to profitability by focusing on development of high-tech aluminum lithium alloys for the aerospace industry. (Tr. Vol. Ill at 22; D. Ex. 54.) Accordingly, in 1998, he arranged for the acquisition of the McCook plant. (Tr. Vol. Ill at 36; D. Ex. 54.)

However, the acquiring entity was not MAP, but a new Illinois limited liability company, McCook Metals, L.L.C. ("McCook"). (Trustee Findings at 3, § 9; Lynch Response at 3.) Lynch was a 50% member owner of McCook and, at all times relevant to this case, was its chairman and chief executive officer. (Joint Pre-Trial Statement at 11, ¶ C.1.e; Trustee Findings at 2, 3, ¶¶ 3, 13; Lynch Response at 2, 4.) In these capacities, Lynch was authorized to preside over all meetings of the members and board of managers and, subject to the direction of that board, to manage the business of the company. (D. Ex. 37, at 19, § 5.7(d), (g).) He had the most weight in the decision-making process at McCook and was generally "in charge." (Babirak Dep. at 103-04.)

In connection with the McCook acquisition, Reynolds agreed to supply McCook with all of the high purity aluminum it required during the period 1998 through 2003, at a fixed premium over the price for commodity aluminum (the "Supply Agreement"). (P.Ex. 41; Tr. Vol. I at 62-63; Tr. Vol. Ill at 37, 40.) Reynolds provided this high purity aluminum from its Longview, Washington smelter, and McCook in fact purchased substantially all of its high purity aluminum from this smelter. (Trustee Findings at 4, ¶¶ 16-18; Lynch Response at 5.)

General Electric Capital Corporation ("GECC") provided financing for the McCook acquisition. (Trustee Findings at 3, ¶ 10-11; Lynch Response at 3-4.)

Initially, McCook's business was successful; the financial results in the first year of its operations (1998-99) substantially exceeded the projections of the business plan presented to GECC. (Tr., Vol. Ill at 25.) However, beginning in the second half of 1999 and continuing thereafter, McCook's financial performance suffered from reduced prices for its products and higher costs for raw materials. (Babirak Dep. at 83.) Lynch attributed much of this decline in financial performance to competition from Alcoa, Inc. ("Alcoa"), a vertically integrated entity that controlled its own raw materials and was McCook's largest competitor in the production of aluminum plate for aerospace operations. (Tr. Vol. I at 62-63; Tr. Vol. III at 41^5; D. Ex. 54.)

Whatever the cause, McCook's financial condition had deteriorated sufficiently that as early as the year 2000, GECC became concerned about the situation and eventually transferred the McCook account to a watch list for financially troubled companies. (Tr. Vol. IV at 64, 66-67.) By December 31, 2000, McCook was insolvent, unable to pay its debts as they became due, and was engaging in business with unreasonably small amounts of capital, as determined at a prior, bifurcated trial in the 2002 Adversary. (See Order of January 16, 2004.) On August 6, 2001, McCook filed a voluntary bankruptcy petition, giving rise to the present case.

B. The antitrust action against Alcoa

In the summer of 1999, the officers at McCook became aware that Alcoa and Reynolds intended to merge. (Tr. Vol. I at 62; Tr. Vol. Ill at 51-52; D. Ex. 53.) This potential merger was alarming to Lynch and the other McCook member owners, because it would put Reynolds' Longview smelter-the source of McCook's high purity aluminum-under the control of McCook's principal competitor. (Trustee Findings at 6, ¶ 29; Lynch Response at 7.) Accordingly, McCook opposed the merger in proceedings before the U.S. Department of Justice and the European Union Competition Committee (the "EU"). (Tr. Vol. I at 63-63; Tr. Vol. Ill at 54-62; D. Ex. 54.) Only the EU provided any relief to McCook, and the relief was limited to imposing a condition on the proposed merger-that after merging with Reynolds, Alcoa would be required to divest at least 25 percent of its ownership interest in the Longview smelter. (D. Ex. 52; Tr. Vol. I at. 67; Tr. Vol. II at 62.) Viewing this as an inadequate remedy, McCook filed an antitrust action against Alcoa in the District Court for the District of Columbia on May 8, 2000. (D. Ex. 55; Tr. Vol. I at 67-69; Tr. Vol. Ill at 63.)

GECC was aware of McCook's efforts to oppose the Reynolds-Alcoa merger and voiced no objection to McCook committing its resources in those efforts. (Trustee Findings at 7, ¶ 34; Lynch Response at 8.)

C. McCook's agreement to purchase the Longview smelter

In June 2000, two months after McCook filed its antitrust action, it received a confidential memorandum from Alcoa offering to sell all or a portion of its interest in the Longview smelter. (Tr. Vol. I at 71; P.Ex. 36.) McCook conducted due diligence and submitted an initial offer to Alcoa, "priced in a manner that would result in the settlement of litigation." (P.Ex. 20; D. Ex. 58, 62; Tr. Vol. I at 76-77; Tr. Vol. IV at 27-29.)

Negotiation of the purchase price for the Longview smelter occurred in July and August of 2000 through a series of communications between Lynch and John Kolleng of McCook and Irene Schmidt of Alcoa. (P.Ex. 20; D. Ex. 62.)² McCook initially offered Alcoa $135 million in cash, plus outstanding accounts receivable and finished inventory. (Tr. Vol. I at 74; D. Ex. 62; ...