Matter of Rickel Home Centers, Inc.

• Decision Date: 16 August 1996
• Docket Number: Bankruptcy No. 96-26. Adversary No. 96-30.
• Citation: 199 BR 498
• Parties: In the Matter of RICKEL HOME CENTERS, INC., Debtor. RICKEL HOME CENTERS, INC., Plaintiff, v. Robert BAFFA, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

199 B.R. 498 (1996)

In the Matter of RICKEL HOME CENTERS, INC., Debtor RICKEL HOME CENTERS, INC., Plaintiff, v. Robert BAFFA, Defendant.

Bankruptcy No. 96-26. Adversary No. 96-30.

United States Bankruptcy Court, D. Delaware.

August 16, 1996.

Robert E. Gerber, Demet Basar, Fried, Frank, Harris, Shriver & Jacobson, New York City, Laura Davis Jones, Brendan L. Shannon, Young, Conaway, Stargatt & Taylor, Wilmington, Delaware, for Plaintiff.

Joanne B. Wills, Blank Rome Comisky & McCauley, Wilmington, Delaware, Mark W. Gaffney, Jacqueline Sailer, Rabin & Garland, New York City, for Defendant.

HELEN S. BALICK, Chief Judge.

In this adversary proceeding, the debtor Rickel seeks declaratory or injunctive relief against Robert Baffa from proceeding with a securities law class action pending in the United States District Court for the Southern District of New York entitled Baffa v. Donaldson, Lufkin & Jenrette et al.

Rickel Home Centers, Inc. filed its Chapter 11 petition in this court on January 10, 1996. The Baffa action was filed on January 26, 1996. In addition to DLJ, the Baffa securities action names as defendants Eos Partners, General Electric Capital Corporation, and five individuals: A. Andrew Levison, Steven M. Friedman, Douglas R. Korn, Jules A. Borshadel, and John K. Henry. Rickel is not a defendant in the Baffa action.

The Baffa complaint alleges the following. The action is on behalf of Baffa and similarly situated purchasers of units of senior notes and warrants to purchase shares of common stock of Rickel Home Centers, Inc. The purchasers bought these notes and warrants in an initial public offering of about $126 million made in November 1994 pursuant to a registration statement and prospectus. The registration statement contained materially false and misleading financial information about Rickel, and further failed to disclose material information, in violation of securities laws and common law. Each of the five individual defendants at the time of the offering was an officer of Rickel, a member of the board of directors, or signed the registration statement. Each individual defendant knew of and intentionally misrepresented and omitted the material facts. In five claims, the Baffa complaint seeks actual and punitive damages, and attorneys' fees.

In this adversary proceeding, filed on February 28, 1996, Rickel seeks a declaration that section 362 of title 11 stays all further prosecution of the Baffa action. Rickel alternatively seeks an injunction pursuant to section 105(a) of title 11 to enjoin further proceedings in the Baffa action until a plan of reorganization has been consummated.

The record includes a detailed pre-trial stipulation and order and evidence admitted today. The court finds the following.

Mr. Henry is executive vice president and CFO of Rickel. He is involved in Rickel's day-to-day operations, and is responsible for overseeing the financial aspects of Rickel's reorganization. He believes a realistic target date for a confirmed plan in Rickel is well into 1997. The Baffa action, if not enjoined during the interim time period between now and then, will interfere with the ability of Mr. Henry to operate the business of Rickel, and the ability of Mr. Henry to participate in the Chapter 11 reorganization process.

Jules Borshadel was Rickel's President and CEO and a member of Rickel's Board of Directors from August 1994 until July 23, 1996, when he stepped down from those positions. His present responsibilities to Rickel are minimal if any, and decreasing with time.

Mr. Friedman, the chair of the board of directors, provides management and consulting services to Rickel. He is involved in the reorganization efforts, has oversight responsibility for Rickel's business, and is involved in the daily and weekly operations. Significantly, Mr. Friedman has many interests and responsibilities other than his work for Rickel. Although his attention to Rickel may have increased since Jules Borshadel resigned, Friedman does not spend a significant amount of his time on Rickel matters. Rickel has not shown that Mr. Friedman will be prevented from carrying out his responsibilities to Rickel if the Baffa action goes forward. Similarly, the court is not persuaded that the other two individual Baffa defendants, who have no active involvement in or responsibility for Rickel's reorganization efforts or the conduct of Rickel's business, will be prevented from carrying out their respective responsibilities to Rickel if the Baffa action goes forward.

Discovery in the Baffa action is detailed in paragraphs 49 and 50 of the joint stipulation, and has been narrowed by Mr. Rabin today. Nonetheless, this discovery is not, as Baffa characterizes, necessarily limited in scope. Baffa may want to depose any number of Rickel's employees, including for example those responsible for the preparation of the offering documents, and the assimilation of information of operating results into the 1994 financial reports. This discovery, if not stayed, will impose significant burdens on employees of Rickel and interfere with the reorganization efforts. In the aggregate, the Baffa action would consume time, energy, and resources of Rickel and hinder the reorganization effort.

It is stipulated that one or more of the Baffa defendants intend to file a motion to dismiss the securities action. Baffa argues, and Rickel does not dispute, that if a motion to dismiss is filed, pursuant to securities law all discovery will be automatically stayed. Mr. Rabin has stated that Baffa will seek to invoke an exception to that stay, however, the court can remove that possibility through today's order. Moreover, Rickel has not shown the burden on Mr. Henry and other Rickel employees in participating in a motion to dismiss is anything more than minimal in nature. The decision to file a motion to dismiss has been made, the facts are those stated in the complaint, and legal counsel will be primarily responsible for drafting the briefs.

Addressing Rickel's first request for relief, the controlling law is set forth In re Continental Airlines, 177 B.R. 475 (...