In re National Forge Co., Civ.A. 04-21 ERIE.

• Court: United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
• Writing for the Court: Mclaughlin
• Citation: 344 B.R. 340
• Parties: In re NATIONAL FORGE COMPANY, et al., Debtor. Official Committee of Unsecured Creditors of National Forge Company, Plaintiff, and Official Committee of Retirees of National Forge Company, Intervenors, v. E. Roger Clark, et al., Defendants.
• Docket Number: No. Civ.A. 04-21 ERIE.,Civ.A. 04-21 ERIE.
• Decision Date: 09 June 2006

344 B.R. 340 In re NATIONAL FORGE COMPANY, et al., Debtor.
Official Committee of Unsecured Creditors of National Forge Company, Plaintiff, and
Official Committee of Retirees of National Forge Company, Intervenors,
v.
E. Roger Clark, et al., Defendants. No. Civ.A. 04-21 ERIE. United States District Court, W.D. Pennsylvania. June 9, 2006.

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COPYRIGHT MATERIAL OMITTED

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David W. Lampl, John M. Steiner, Leech, Tishman, Fuscaldo & Lampl, Pittsburgh, PA, for Plaintiff.

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Lawrence C. Bolla, Arthur D. Martinucci, Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc., Erie, PA, for Intervenors.

James D. McDonald, The McDonald Group, L.L.P., Erie, PA, Douglas A. Campbell, Erik Sobkiewicz, Campbell & Levine, Pittsburgh, PA, Bradley J. Walent, Joel M. Walker, Duane Morris, Pittsburgh, PA, for Defendants.

MEMORANDUM OPINION

MCLAUGHLIN, District Judge.

Currently pending before the Court in this adversary proceeding is a motion for partial summary judgment filed and/or joined in by all of the Defendants. The adversary proceeding was originally commenced in the Bankruptcy Court, but the reference was withdrawn pursuant to our order dated March 1, 2004 upon the agreement of all parties. Consequently, this Court now has original jurisdiction over the matter pursuant to 28 U.S.C. § 157(d) and § 1334(b).

For the reasons set forth below, the Defendants' motion will be granted and judgment will be entered in favor of all Defendants on Counts 1 through 7 of the Amended Complaint. As to Count 8, judgment will be entered in favor of all Defendants, except for E. Roger Clark, Maurice J. Cashman, Dana Beyeler, Robert A. Kaemmerer, and Ashtok Khare.

I. STANDARD OF REVIEW

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories and admissions on file, together with any affidavits, show that there is no genuine issues as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine the facts in the light most favorable to the party opposing the motion. International Raw Materials, Ltd. v. Stauffer Chemical Co., 898 F.2d 946, 949 (3d Cir.1990). The moving party has the initial burden of demonstrating that, given the evidence of record, no reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Once the moving party satisfies its burden, the burden shifts to the non-moving party, who must go beyond its pleadings and designate specific facts by the use of affidavits, depositions, admissions, or answers to interrogatories showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Wilson v. Lemington Home for the Aged, No. 99-1893, 2000 WL 33712287 at *1 (W.D.Pa. April 12, 2000). Entry of judgment is mandated against any party who fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp., 477 U.S. at 322, 106 S.Ct. 2548; Wilson, supra, at *1.

II. BACKGROUND

The present dispute arises out of the redemption of certain shares of National Forge Company Holding Inc.'s stock which occurred on April 13, 1999. The Official Committee of Unsecured Creditors (the "Committee") seeks, inter alia, to set aside the redemption and recover the payments made to shareholders in connection therewith.¹ Some background information

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is essential to an understanding of the present dispute²

Prior to its demise, National Forge Company ("NFC") was a Pennsylvania corporation engaged in the business of manufacturing heavy, precision-machined, forged steel components. In 1995 NFC Holdings ("Holdings") was formed by an employee stock ownership plan and certain NFC employees as a vehicle to acquire the stock of NFC's then-owners. The acquisition was partly funded through the employees' purchase of 116,347 shares of Class B stock in Holdings, which generated $1,284,470.88. This sum, together with bank loans, funded Holdings' purchase of NFC's stock and supplied the companies' working capital needs. Thus, in 1995 NFC became a wholly-owned subsidiary of Holdings, whose ownership, in turn, was comprised of two classes of common stock: Class A shares, which were held exclusively by the National Forge Company Holdings, Inc. Employee Stock Ownership Plan (the "ESOP"), and Class B shares, which were held by certain directors, officers, and/or management-level employees of NFC — almost all of whom have been named as individual Defendants in this action.

Defendants contend that the disputed redemption was the product of an important change in the federal corporate tax laws. In 1997, qualified retirement plan trusts like the ESOP became eligible to be shareholders in corporations that elected to be taxed under Subchapter S of the Internal Revenue Code of 1986. See Small Business Job Protection Act of 1996, Pub.L. No. 104-188, § 1310, and the Taxpayer Relief Act of 1997, Pub.L. No. 105-34, § 1601. Because qualified retirement plan trusts were generally exempt from federal and state income taxes, this change in the law meant that a corporation wholly owned by an employee stock ownership plan could avoid federal and state income taxes by electing to be taxed under Subchapter S of the IRC, thereby allowing all of the corporate income to pass through to a tax-exempt shareholder.

Defendants maintain that, because the ESOP was Holdings' largest shareholder, these changes in the tax laws offered significant potential tax savings to Holdings. Having been advised by outside legal counsel, accounting professionals and valuation experts as to the benefits of electing Subchapter S status, Holdings on December 22, 1998 unanimously elected — through its full board of directors — to take Subchapter S status.³

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On the other hand, a corporation electing Subchapter S status could have only one class of stock. See 26 U.S.C. § 1361(b)(1)(West 1998). Thus, Holdings could not eliminate its federal income tax liability until it eliminated its Class B (i.e. non-ESOP held) shares. Accordingly, in the same resolution by which it authorized Holdings to elect Subchapter S status, Holdings' Board of Directors also authorized the corporation to eliminate its outstanding Class B shares by redeeming the stock at a price of $49.42 per share. That redemption price was premised upon a December 14, 1998 report issued by Holdings' valuation expert, Valuemetrics, Inc., which fixed the value of the company's Class A and Class B shares at $49.42 per share as of June 30, 1998.

The Board further resolved that, in the event Class B shareholders did not agree to the terms of redemption, management was to take the steps necessary to merge Holdings into a new entity so that the outstanding Class B shares could be replaced with shares of a single class in the successor entity. The resolution further authorized Holdings to borrow funds as needed by drawing upon an existing credit facility with the Defendant Banks. Holdings subsequently obtained approval from the Banks to use up to $4 million to fund the redemption of the Class B share. These loans were secured by a lien upon substantially all of NFC's assets.

Ultimately, all of the Class B shareholders accepted Holdings' redemption offer. To effectuate the payment, NFC on April 13, 1999 directed The Chase Manhattan Bank to transfer $5,749,868.74 (the aggregate redemption price) from an NFC operating account to a Holdings' account at Chase. That same day, Holdings repurchased the outstanding Class B shares in one of two ways. For those 94,538 shares held in individual retirement accounts at National City Bank, Holdings directed Chase to wire transfer to National City Bank a single payment of $4,672,067.96, which was then distributed by National City Bank to the relevant IRA accounts according to the number of shares being redeemed. For those individuals holding shares outside of IRAs, Holdings issued each shareholder a check in the relevant amount drawn on a Holdings' account at Chase. The payments to redeem non-IRA shares totaled $1,077,800.78. Thus, following the redemption of its Class B shares, Holdings had only a single class of stock, all of which was owned by the ESOP.

On March 6, 2002 NFC, Holdings, and another affiliated company (NFC Components) each filed petitions for relief under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court subsequently approved an amended joint plan of liquidation filed by NFC and NFC Components, pursuant to which substantially all of the companies' assets were sold and the proceeds and remaining assets re-vested in a new entity, Liquidating NFC, for distribution to creditors.

We have previously discussed the procedural history relative to the filing of this Adversary Proceeding, see In re National Forge Co., 326 B.R. 532 (W.D.Pa.2005), and we need not repeat that discussion here. For present purposes, it is sufficient to note that the Committee filed its Amended Complaint on August 22, 2005 (see Doc. # 39), asserting eight causes of action against three groups of Defendants involved, directly or indirectly, with the stock redemption.⁴ Counts 1-3 assert

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claims against all Defendants for alleged violations of the Pennsylvania Uniform Fraudulent Transfer Act (UFTA). Counts 4-6 assert claims against the Director and Officer Defendants for alleged violations of the Pennsylvania Business Corporation Law. Counts 7 and 8 assert claims against the Director and Officer Defendants for alleged violations of, respectively, the Delaware General Corporation Law and Delaware common law breach of fiduciary duty.

Certain of the Director and Officer Defendants (i.e., Defendants Clark, Cashman, Beyeler and Kaemmerer, hereafter the "Moving...