In re Revco DS, Inc.

Citation118 BR 468
Decision Date24 July 1990
Docket NumberBankruptcy No. 588-1305,588-1321,588-1761 to 588-1812 and 588-1820.,588-1308
PartiesIn re REVCO D.S., INC. et al., Debtors.
CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio

John Silas Hopkins, III, Baker & Hostetler, Cleveland, Ohio, for debtors.

Stuart E. Hertzberg, Pepper, Hamilton & Scheetz, Detroit, Mich., for Unsecured Trade Creditors' Committee.

Conrad Morgenstern, Cleveland, Ohio, U.S. Trustee.

Brad Eric Scheler, Fried, Frank, Harris, Shriver & Jacobson, New York City, for Unsecured Noteholders' Committee.

Robert J. White, O'Melveny & Myers, Los Angeles, Cal., for Unofficial Committee of Secured Bank Lenders.

Richard Lieb, William J. Rochelle, Kronish, Lieb, Weiner & Hellman, New York City, for Unofficial Preferred Equity Committee.

Frederick M. Luper, Luper, Wolinetz, Sheriff & Niedenthal, Columbus, Ohio, for Odd Lot Trading, Inc. Creditors Committee.

John R. Lee, S.E.C., Chicago, Ill.

Barry L. Zaretsky, Kelley, Drye & Warren, New York City.


HAROLD F. WHITE, Bankruptcy Judge.

On July 20, 1990, a hearing was held in this Court on the "Motion of New York Life Insurance Company and New York Life Insurance and Annuity Corporation for Authority to Commence Suit Derivatively on Behalf of Revco Against Various LBO Participants, and for Relief from the Automatic Stay to Permit New York Life to Commence Suit Directly Against Various LBO Participants" (the "Motion") Relief from Stay Docket ("Docket") No. GG-1. Due notice of said hearing was provided to all parties pursuant to the administrative orders entered in these proceedings. Among those present at the hearing were counsel for New York Life Insurance Company and New York Life Insurance and Annuity Corporation ("New York Life"), the Debtors, the Official Committee for Unsecured Trade Creditors and Unsecured Noteholders, Professor Barry Lewis Zaretsky and the Unofficial Committee of Secured Bank Lenders.


On July 26 and July 28, 1988 and October 4 and October 5, 1988, Revco D.S., Inc. and substantially all of its subsidiaries including the subsidiary Odd Lot corporations, (collectively the "Debtors") filed for protection under chapter 11 of the Bankruptcy Code. On April 24, 1990, this Court confirmed the plan of reorganization for the Odd Lot corporations.

To date no disclosure statement or plan of reorganization has been filed with this Court for the Revco corporations. This Court has granted Debtors four (4) extensions on the period of exclusivity in which only Debtors may file a disclosure statement and plan of reorganization. At present, July 31, 1990, is the due date for Debtors to file a disclosure statement and plan of reorganization. Debtors have filed a motion to extend the exclusive period until October 31, 1990, this motion is pending with the Court and set for hearing on July 24, 1990. (Main Case Docket No. 1777).

On September 23, 1988, the U.S. Trustee ("UST") filed a motion for appointment ("Motion for Appointment") of an examiner pursuant to 11 U.S.C. § 1104(b)(2) to investigate the 1986 leveraged buyout transaction of the Debtors (the "LBO"). The LBO was effected through a series of corporate transactions wherein Anac Holding Corporation ("Anac") acquired Revco D.S., Inc., a Michigan corporation ("Old Revco"). In addition, Revco D.S., Inc. became a Delaware corporation. On October 24, 1988, this Court denied the Motion for Appointment and found that the request of the UST was "premature". The UST appealed that order to the district and circuit courts. The Sixth Circuit issued a decision reversing this Court's order and ruled that when the requirements of 11 U.S.C. § 1104(b)(2) are met and upon request of a party in interest or the UST, the Bankruptcy Court shall order the appointment of an examiner.

On June 14, 1990, after expedited notice and hearing, this Court entered an order approving the UST's appointment of Professor Barry Lewis Zaretsky as examiner (the "Examiner") (Main Case Docket No. 1722). The UST's appointment was filed and set for expedited hearing upon the agreement of all parties in interest in these proceedings. Counsel for the Debtors and all the creditor constituencies were present at the hearing and expressed their approval of the Examiner.

The Court was urged by all parties present that the Examiner be approved at this time as there was limited time for him to conduct the LBO investigation as it was necessary that a report be filed on or before July 17, 1990.

As the appointment of the Examiner came before the Court on an expedited basis, this Court approved the appointment on recommendation of the UST, the Debtors and the Committees.

The Order approving appointment of the Examiner provided:

The Examiner shall investigate potential causes of action and other remedies arising out of the leveraged buyout and the attendant benefits and detriments to the estates of Revco, D.S., Inc. and Anac Holding Corporation associated with pursuing any such causes of action and other remedies, and shall prepare a written statement of investigation regarding the desirability of pursuing any alleged causes of action found and other remedies. Additionally, the Examiner shall conduct any further investigation he deems appropriate after notice and hearing and after Court approval.

Order Approving Appointment of Examiner, p. 2, (Main Case Docket No. 1722).

On July 16, 1990, the Examiner filed his preliminary report on his investigation (the "Report"). (Main Case Docket No. 1823).*

New York Life filed the Motion on June 27, 1990. In the Motion, New York Life seeks an order authorizing it to commence and prosecute a lawsuit derivatively, (and double derivatively), in the name of and on behalf of Revco D.S., Inc. ("Revco") and its parent, Anac against various defendants asserting various claims for relief arising out of the LBO. This Court scheduled the hearing on the Motion on July 10, 1990. At the request of the Trade Committee the hearing was adjourned until after the Examiner filed his Report. By agreement of all parties, the hearing on the Motion was scheduled for July 20, 1990.

Based upon the evidence presented, being the Report and testimony of three witnesses called by New York Life, this Court makes the following Findings of Fact.

Findings of Fact

1. This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334 and General Order No. 84 of the Northern District of Ohio. Venue is proper in this district pursuant to 28 U.S.C. § 1409. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).

2. To date no disclosure statement or plan of reorganization has been filed in the Revco cases.

3. The potential Michigan corporate statutory causes of action arising out of the LBO from the Michigan Business Corporation Act (the "Michigan Act"), effective in 1986, expire on July 25, 1990. Report, pp. 496-97, 509. The statute of limitations on other causes of action arising out of the LBO expire in late 1990 and no sooner than November 1990. Id., at 496-97.

4. Possible causes of action analyzed under the Michigan Act by the Examiner include sections 351 (improper dividend or distribution), 365 (improper share repurchase), 551(1)(a) (directors' liability for unlawful payment or distribution), and 551(3) (shareholder liability). Report, pp. 504-09.

5. New York Life called three witnesses, Harold Herzog, a member of the Board of Directors of Revco and Anac, Boake A. Sells, chief executive officer of Revco and a member of the Board of Directors of Revco and Anac, and the Examiner.

6. The Board of Directors of Revco and Anac consist of the same members. Two members of the Board of Directors were selected by New York Life.

7. The Board of Directors consists of members with emphasis in financial rather than retail business.

8. The Examiner testified and recommends in the Report that litigation not be commenced prior to the expiration of the statute of limitations for the Michigan Act claims. See, Report, pp. 479, 480 and 504.

9. The Report states at page 504:

The Examiner has reviewed the Michigan Act as it existed in 1986 and concludes that claims could be stated under the Michigan Act against directors and shareholders of Old Revco. Nevertheless, because of the difficulty of meeting the burden of proof, the uncertainty of achieving a substantial recovery, the fact that little if any incremental benefit is offered over a fraudulent conveyance action, and an adverse effect on plan negotiations would likely result if litigation were commenced, the Examiner concludes that the Michigan actions should not be pursued.

10. The Examiner concluded that "substantial obstacles exist in sustaining an action and recovering damages against Old Revco's former officers and directors" under section 551(1)(a) of the Michigan Act. Report, p. 508. Section 551(1)(a) of the Michigan Act provides that directors who vote for dividends or distribution of assets to shareholders contrary to the Michigan Act without adequately providing for the corporation's known debts and obligations are jointly and severally liable to the corporation for the benefit of its creditors and shareholders to the extent of a legally recoverable injury, up to the amount of the unlawful payment or distribution. Report, pp. 506-07.

The statute specifically provides, however, that a director or officer is not liable under this section if he complied with section 541 of the Michigan Act.

Section 541 of the Michigan Act states:

A director or an officer shall discharge the duties of that position in good faith and with that degree of diligence, care and skill which an ordinarily prudent person would exercise under similar circumstances in a like position. In discharging his or her duties, a director or an officer, when acting in good faith, may rely upon the opinion of counsel for the corporation, upon the

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