MFS/Sun Life Trust v. Van Dusen Airport Services
| Decision Date | 23 October 1995 |
| Docket Number | No. 91 Civ. 3451 (SWK) (JCF),92 Civ. 1470 (SWK) (JCF).,91 Civ. 3451 (SWK) (JCF) |
| Citation | 910 F. Supp. 913 |
| Parties | MFS/SUN LIFE TRUST-HIGH YIELD SERIES, Massachusetts Financial High Income Trust and Lifetime High Income Trust, Plaintiffs, v. VAN DUSEN AIRPORT SERVICES COMPANY, Limited Partnership, Mast Resources, Inc., Air Partners, Inc., MTH Holdings, Inc., Miller Tabak Hirsch & Co., MTH Co., LDH Partners, SLT-II, Inc., (formerly SLT Inc.), JDM Inc., VII Partners, Limited Partnership, Jeffrey D. Miller, Jeffrey S. Tabak, Susan L. Tabak, Gary D. Hirsch, Eugene A. DePalma, Richard Meli, James A. Lash and John Does 1 Through 50, Defendants. Martin D. RICH and Norman I. Rich, General Partners of Tri-R By Products, an Iowa General Partnership, Plaintiffs, v. AIR PARTNERS, INC., MTH Holdings, Inc., Miller Tabak Hirsch & Co., MTH Co., LDH Partners, SLT-II, Inc., (formerly SLT Inc.), JDM Inc., VII Partners, Limited Partnership, Jeffrey D. Miller, Jeffrey S. Tabak, Susan L. Tabak, Gary D. Hirsch, Eugene A. DePalma, Richard Meli, James A. Lash and John Does 1 through 50, Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Charles M. Carberry, Marc S. Kirschner, Robert W. Gaffey, Marla S.K. Gale, Jones, Day, Reavis & Pogue, New York City, for plaintiffs in No. 91 Civ. 3451.
Neal M. Goldman, Mark H. Jackson, Philip Raible, Squadron, Ellenoff, Sheinfeld & Sorkin, New York City, for plaintiffs in No. 92 Civ. 1470.
Louis C. Lustenberger, Jr., Alan B. Howard, Christoph C. Heisenberg, Donovan Leisure Newton & Irvine, New York City, for defendants.
The popularity of leveraged buyouts reached its zenith in the 1980's, but the legal fallout from these transactions continues to descend on the courts. In the simplest terms, a leveraged buyout is the purchase of a company using its own assets as security for financing the acquisition. The consolidated cases here arose from the buyout of the Van Dusen Airport Services Company ("VDAS") in 1988. The plaintiffs are holders of senior subordinated notes issued by VDAS in 1987. In 1990, VDAS ceased making payments of interest and principal on the notes, and the plaintiffs commenced these actions, contending that the leveraged buyout constituted a fraudulent conveyance.
The plaintiffs contend that the transfer of VDAS's assets was an actual fraudulent conveyance in that it was accomplished with the intent to avoid the payment of creditors. They further claim that the buyout was a constructive fraudulent conveyance because the transfer was not made for fair consideration and rendered VDAS insolvent, unable to pay its debts as they came due, and without adequate working capital. The plaintiffs named as defendants the purchasers of VDAS, VDAS itself, and the prior owners who profited from the sale of their interests. As will be discussed in more detail below, a settlement was reached during the pendency of the action between the plaintiffs on one hand and VDAS and its new owners on the other.
The claims against the remaining defendants were tried before me on consent of the parties pursuant to 28 U.S.C. § 636(c). This opinion constitutes my findings of fact and conclusions of law under Rule 52 of the Federal Rules of Civil Procedure.
In January 1986, Miller Tabak Hirsch & Co., a group of investors including defendant Gary Hirsch, purchased a controlling interest in Van Dusen Air Incorporated ("VDAI"), a multifaceted aviation company. (Tr. 906-8, 914).1 The following November, VDAI sold its divisions involved in the manufacture and sale of aircraft parts and engine overhaul to Aviall of Texas. (Tr. 910-12; PX 2 at 200086).2 At the same time, VDAI transferred its fixed-base operations ("FBO") business to VDAS, a partnership whose principal owner was Mr. Hirsch. (Tr. 910-11). FBOs are airport-based businesses that provide fuel, maintenance, hangaring, and other services to aviation customers including companies that operate their own corporate aircraft. At the time VDAS was formed, it operated FBOs in (1) Minneapolis, Minnesota, (2) Lexington, Kentucky, (3) Columbus, Georgia, (4) Corpus Christi, Texas, (5) Anchorage, Alaska, (6) Boston, Massachusetts, (7) Detroit, Michigan, and (8) Atlanta, Georgia. (PX 2 at 200102). The operations in Atlanta and Detroit were not full-service FBOs, but rather locations where VDAS had a contract for fueling a major air carrier. (Tr. 1452; PX 2 at 200102; DX 147 at M0002076-77, M0002105-06).
From the outset, defendant Eugene DePalma was VDAS' Chief Executive Officer, and defendant Richard Meli was its Chief Operating Officer. (Tr. 914). They expanded the operation of VDAS by acquiring eight additional FBOs at five airports between June 1987 and May 1988 at a total cost of approximately $27.1 million:
FBO Date of Acquisition Location Price Paid
($mm)
Des Moines Flying Service June 1987 Des Moines, IA $4.3
Nashville Jet Center June 1987 Nashville, TN 4.3
Million Air Oct. 1987 Cleveland, OH 2.3
Tennessee Jet Corp. Dec. 1987 Nashville, TN 4.0
Milwaukee Aero Dyne Dec. 1987 Milwaukee, WI 1.0
Nashville Aviation Services Jan. 1988 Nashville, TN 3.2
Cedar Rapids Jan. 1988 Cedar Rapids, IA 0.6
Milwaukee Aero Services May 1988 Milwaukee, WI 7.4
(Joint Pre-Trial Order ("PTO"), Stip.Facts ¶ 21; DX 147 at M0002039).
For each FBO purchased, VDAS formulated an acquisition analysis that examined the FBO's historical financial performance, made adjustments based on consolidation into the VDAS chain, and projected earnings for the FBO. (DX 45, 46, 55, 61, 75). In general, VDAS anticipated doubling the earnings of the newly-acquired FBOs, since it had achieved similar results when it had previously purchased bases. (DX 61). VDAS also planned to upgrade and reorganize the operations at its new FBOs. For example, it intended to dispose of the charter and part sales businesses at Des Moines and focus on more profitable fueling and hangaring operations. (Tr. 917-20). At Nashville, VDAS planned to consolidate its three FBOs, renovate the premiere terminal facility known as the "Mansion," and reallocate hangar space to benefit its major customer, Northern Telecom. (Tr. 921-28). VDAS also anticipated capital improvement and consolidation of its two bases in Milwaukee as well as improvements at Cedar Rapids. (Tr. 932-37).
In March 1987, in order to pay off existing debt and finance its expansion, VDAS issued twelve percent senior subordinated notes due in 1997 and valued at $50 million (the "twelve percent notes"). Interest on the notes would be payable each March 15 and September 15, beginning in September 1987. Each note was marketed in a "Unit" together with a Contingent Payment Obligation ("CPO"). A holder of a CPO would be entitled to a payment upon the occurrence of certain "triggering events" such as a merger of VDAS with another entity or a public offering of its partnership interests. (DX 7 at 02128-02132).
James T. Swanson, Senior Vice President and portfolio manager for Massachusetts Financial Services and investment advisor to the plaintiffs MFS/SUN Life Trust-High Yield Series, Massachusetts Lifetime Financial High Income Trust, and Lifetime High Income Trust (collectively, "MFS"), investigated the suitability of the investment. (Tr. 27-28, 38). MFS had previously invested in 14.5 percent private placement bonds issued by VDAI. (Tr. 36; DX 4). Mr. Swanson recommended that MFS now buy the VDAS units, noting in part that the company was an ideal candidate for a leveraged buyout. (DX 6).
Ultimately MFS purchased approximately $4 million of the twelve percent notes and the associated CPOs (PTO, Stip.Facts, ¶ 23). At the same time, plaintiffs Martin D. Rich and Norman I. Rich bought a total of $200,000 of the twelve percent notes and CPOs for NR Investment Associates and MR Investment Associates, partnerships made up of their respective family trusts. (Tr. 709-10). These entities subsequently transferred the investments to Tri-R By Products, a partnership between Martin and Norman Rich. (Tr. 709-10).
In March 1988, Mr. Hirsch first proposed the sale of VDAS. (Tr. 943-45; DX 107). As the initial step in a buyout, the limited partners of VDAS would exchange their interests for partnership interests in VII Partners, L.P. ("VII"). Air Partners, Inc. ("API"), which was the managing general partner of VDAS, would become the managing partner of VII. (DX 107).
Mr. Hirsch engaged Salomon Brothers, Inc. to prepare an offering memorandum for the sale of VDAS. (Tr. 948). This Memorandum reviewed VDAS' past performance and set forth cash flow projections developed by the company's management. (DX 108).
Initially, Mr. DePalma and Mr. Meli were asked about their interest in purchasing VDAS. Mr. DePalma declined because he preferred to remain as an operator rather than an owner, and Mr. Meli lacked the necessary capital. (Tr. 900-01; Deposition of Richard J. Meli dated Feb. 25, 1992 at 96). Other parties did express interest, including a partnership consisting of former United Airlines Chief Executive Officer Dick Ferris and golfer Arnold Palmer, Triton Energy Corporation, Bessemer Trust Company ("Bessemer"), the Wesray investment banking firm, and Mike Rosenthal, a former partner of Wesray. (Tr. 874, 950). The most serious inquiries were made by Bessemer and Mr. Rosenthal. Bessemer representatives discussed a potential transaction in the range of 100 to 110 million dollars. (Tr. 951-52). Mr. Hirsch and his partners rejected that bid because Bessemer was...
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