Milliken & Co. v. Duro Textiles, LLC.
Decision Date | 30 May 2008 |
Docket Number | SJC-10043 |
Citation | 887 N.E.2d 244,451 Mass. 547 |
Parties | MILLIKEN & COMPANY v. DURO TEXTILES, LLC, & others.<SMALL><SUP>1</SUP></SMALL> |
Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Jeffrey J. Upton, Boston, for plaintiff.
Hillary Richard, of New York (Ian Crawford, Boston, with her) for Duro Textiles, LLC, & others.
Present: GREANEY, IRELAND, SPINA, COWIN, CORDY, & BOTSFORD, JJ.
On November 14, 2002, Milliken & Company (Milliken) filed an action in the Superior Court to recover a $8,754,680.11 trade debt owed by Duro Industries, Inc. (Old Duro). Milliken sought recovery from Duro Textiles, LLC (New Duro), as the corporate successor of Old Duro.2 The essence of Milliken's first amended complaint for damages and declaratory relief (complaint) was that Patriarch Partners, LLC (Patriarch), and related entities, orchestrated a scheme to acquire the assets of Old Duro, while shedding Old Duro's debts to unsecured creditors, including Milliken. In Count I of its complaint, Milliken asserted a successor liability claim for breach of contract against New Duro, under theories of "de facto merger" or "mere continuation" of the same business, and, in Count VII of its complaint, Milliken sought, inter alia, a declaratory judgment that New Duro was liable for the debts and obligations of Old Duro. As also is pertinent here, in Count VI of its complaint, Milliken asserted that New Duro, Patriarch; Ark CLO2001-1, Limited; Ark Investment Partners II, LP; and Lynn Tilton (collectively, the defendants) engaged in unfair or deceptive trade practices in violation of G.L. c. 93A, §§ 2, 11.3
The parties filed cross motions for summary judgment on Counts I and VII of the complaint, and the defendants also filed a motion for summary judgment on Count VI. Following a hearing, a judge in the Superior Court allowed, in part, Milliken's motion for summary judgment on Count I to the extent that its claim was predicated on a determination that, under either the "de facto merger" or "mere continuation" theory of successor liability, Old Duro became New Duro for purposes of its corporate debt. The judge otherwise denied Milliken's motion for summary judgment on Count I, concluding that a trial was necessary on the issue whether Milliken was an "innocent creditor," entitled to equitable relief. The judge denied the defendants' cross motion for summary judgment on Count I, concluding that they had not shown a lack of harm to Milliken such as would preclude recovery under any theory of successor liability. The judge allowed the defendants' motion for summary judgment on Count VI and dismissed Milliken's claim pursuant to G.L. c. 93A. Finally, the judge denied the parties' cross motions for summary judgment on Count VII with respect to a declaration of successor liability insofar as a trial was necessary on the "innocent creditor" issue. Following a bench trial, the judge found that Milliken was an innocent creditor, one which had not acted with "unclean hands," and, therefore, was entitled to collect its debt from New Duro pursuant to the equitable doctrine of successor liability. A final judgment entered on Count I of the complaint ordering New Duro to pay Milliken $8,754,680.11, plus interest and costs,4 and on Count VII of the complaint declaring that New Duro was liable to Milliken for the debt of Old Duro under theories of successor liability.5
New Duro appealed from the judgments in favor of Milliken on Counts I and VII of its complaint, pertaining to successor liability, and Milliken cross-appealed from the dismissal, on summary judgment, of Count VI of its complaint, pertaining to the defendants' alleged violation of G.L. c. 93A.6 We transferred the case from the Appeals Court on our own motion. New Duro now contends that (1) the requirements of the "de facto merger" or "mere continuation" theories of successor liability were not met where Old Duro remains a corporation in good standing and the owner of substantial assets" in the form of real estate and the right to collect tax refunds; (2) the judge erred in imposing successor liability on New Duro where Milliken failed to demonstrate that it suffered any actual harm as a result of a foreclosure sale of Old Duro's assets; and (3) the judge erred in imposing successor liability on New Duro where such action risks the dissolution of New Duro with no offsetting benefit to Milliken. In contrast, Milliken asserts that (1) the judge erred in dismissing its claim under G.L. c. 93A because a declaratory judgment of successor liability can form the basis for a c. 93A violation; (2) the judge erred in dismissing its claim under c. 93A on the grounds that Milliken did not have a commercial relationship with the defendants and could not establish that it had suffered a loss of money or property within the meaning of the statute; and (3) the judge erred in concluding that a judgment concerning successor liability was independent of c. 93A, and was not predicated on a finding of unfair or deceptive acts or practices. For the reasons that follow, we now affirm the thorough and well-reasoned decisions of the judge below.
1. Background. Old Duro, a Massachusetts corporation, was one of the largest independent dyers, printers, finishers, and distributors of textile products in the United States and was headquartered in Fall River. Milliken, a Delaware corporation, was one of Old Duro's primary suppliers of greige goods, the raw materials used to make textiles. In 1997, investors purchased a majority interest in Old Duro in a leveraged buyout. A consortium of banks, led by Bank of America as agent (the bank group), helped to finance the purchase with loans and revolving credit commitments, as set forth in a credit agreement with Old Duro dated October 31, 1997. These commitments were secured by liens on Old Duro's real property and by security interests in its personal property. Bank of America filed financing statements pursuant to the Uniform Commercial Code, evidencing the bank group's security interests in Old Duro's personal property, and it recorded mortgages on Old Duro's real property.
Beginning in 1999, Old Duro began to experience financial problems due to a downturn in the textile industry and due to its debt structure resulting from the leveraged buyout. By March, 2000, Milliken was aware that Old Duro was behind in its payments, suffering substantial losses, missing its financial projections, defaulting on its loan commitments to secured lenders, and operating with its revolving line of credit suspended. Milliken decided at this time not to increase its exposure to Old Duro above $2.5 million, but it eventually did agree to extend Old Duro's credit terms from thirty to sixty days. In December, 2000, Old Duro underwent a capital restructuring, entering into, among other agreements, an amended and restated credit agreement with the bank group that reduced its total bank debt from $85 million to approximately $46 million. As a result of this restructuring, the bank group acquired 51% of the equity in Old Duro, while other entities held the remaining 49%.
Patriarch, a Delaware limited liability company, was established in 2000 by Lynn Tilton (Tilton), who is its principal and manager. Patriarch acts as the collateral manager or investment advisor for funds with portfolios of distressed secured debt. Its business model is to restructure or reorganize the companies in its portfolios to allow borrowers the time, liquidity, and strategic support to turn around their operations. Ark CLO2001-1, Limited (Ark I), is one of the investment funds created by Tilton for which Patriarch serves as collateral manager.7 On December 28, 2000, Ark I purchased from one member of the bank group its 29% interest in the bank group's secured debt of Old Duro.
By the spring of 2001, Milliken was working on "Project Conceal," its effort to develop a camouflage-dyed nylon product to compete with Old Duro's product for the United States military. Around the same time, Milliken learned that the Balson Hercules apparel lining division of The Balson Hercules Group, Ltd. (Balson), Milliken's largest customer for greige goods, was for sale. Milliken was concerned that if Balson did not survive, it would hurt Milliken's business, so Milliken helped to finance Old Duro's acquisition of Balson by providing it with a $2 million unsecured note. By October, 2001, Old Duro owed Milliken almost $10 million in unsecured trade debt. As of March, 2002, Milliken was "treading water" on its debt from Old Duro, receiving payments that were not sufficient to reduce receivables or to reduce their further aging. By May, 2002, Old Duro was operating at a loss, was in default under its credit agreement, and owed the bank group $41.7 million. At this time, Patriarch prepared and submitted a report to the bank group that valued Old Duro's assets at $16 million, based either on an orderly liquidation of the corporation or on an asset-based refinancing.
Ark Investment Partners II, LP (AIP), is a private equity fund created by Tilton to purchase additional lender interests in borrowers that are in other Patriarch-managed funds. AIP is an equity investor in Ark I. In May, 2002, Larry Himes (Himes), the president and chief executive officer of Old Duro, met with Tilton in an effort to persuade Patriarch to rescue the company. AIP offered to purchase the bank group's remaining 71% interest in Old Duro's secured debt for approximately $11.3 million. After receiving a separate purchase proposal from Old Duro, contingent on an asset-based financing arrangement, the bank group rejected both offers and directed Old Duro's management to begin liquidation. Old Duro retained bankruptcy counsel, and Patriarch offered to provide debtor-in-possession financing and exit financing on emergence in the event that Old Duro wanted to put together a bankruptcy plan. Around the same time, Tilton told Himes that Patriarch had no interest...
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