Unsecured Creditors of Color Tile v. Investcorp
| Citation | 137 F.Supp.2d 502 |
| Decision Date | 20 April 2001 |
| Docket Number | No. 97 CIV. 9261(MGC).,97 CIV. 9261(MGC). |
| Parties | OFFICIAL COMMITTEE OF THE UNSECURED CREDITORS OF COLOR TILE, INC., Plaintiff, v. INVESTCORP S.A., Investcorp International Inc., CIP Limited, Corporate Equity Limited, Acquisition Equity Limited, Funding Equity Limited, Planning Equity Limited, Elias N. Hallak, Nemir A. Kirdar, Michael L. Merritt, Paul W. Soldatos, Jon P. Hedley, Charles J. Philippin, E. Garrett Bewkes, III, Walter F. Loeb, Coopers & Lybrand, L.L.P., Investcorp Bank, E.C., ABF Acquisition Corp., Investcorp Holdings Limited, Window Investments Limited, Shades International Limited, Shades Investments Limited, Blinds Equity Limited, Blinds Holdings Limited, AIBC Investcorp Finance B.V., Investcorp Investment Holdings Limited, Acquisition Capital Limited, Corporate Capital Limited, Funding Capital Limited, and Planning Capital Limited, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Kaye, Scholer, Fierman, Hays & Handler, LLP, New York, NY, By Peter M. Fishbein, Jane W. Parver, Michael A. Lynn, for Plaintiff.
Dewey Ballantine LLP, New York, NY, By Harvey Kurzweil, Joanna R. Swomley, John F. Collins, Lawrence Brocchini, Edith L. Josephson, for Moving Defendants.
Kelley Drye & Warren LLP, New York, NY, By Sarah L. Reid, Co-counsel for Defendant Walter F. Loeb.
Official Committee of the Unsecured Creditors of Color Tile, Inc. sues eight individuals and twenty-three legal entities on 19 grounds. I dismissed ten of the claims (8-18) and four of the defendants (Coopers and Lybrand, LLP, Hedley, Philippin, and Bewkes) at earlier stages of the case. Official Committee of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., et al., 80 F.Supp.2d 129 (S.D.N.Y. 1999) ( Claims 13-18); Official Committee of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., et al., 1999 WL 754015 (S.D.N.Y. Sept.24, 1999) ( Claims 8-12). Defendants have now filed motions for summary judgment seeking the dismissal of all remaining claims. At oral argument, I granted Loeb's motion with respect to Claim Two (alleging that Loeb violated his duty of loyalty to Color Tile), and reserved decision on the remaining motions. See Transcript, December 14, 2000, at 43-44, 99. For the reasons that follow, the motion for summary judgment with respect to Claims One through Five is now granted. Defendants' motion for summary judgment on Claims Six and Seven is denied. Defendants' motion for summary judgment with respect to Claim Nineteen is held in abeyance pending further submissions by the parties.
"The Investcorp Group" comprises a number of related companies and affiliates which act together as principals and intermediaries in a variety of international investment transactions on behalf of themselves and their investors. Investcorp S.A. ("SA"), Investcorp International Inc. ("III"),1 Investcorp Bank, E.C. ("EC"), and various Cayman Island holding companies are some of the companies affiliated with the Investcorp Group.
In 1989, III recommended Color Tile as a potentially attractive investment. In order to facilitate the acquisition of Color Tile, affiliates of EC formed a holding company called Color Tile Holdings, Inc. ("CT Holdings"). CT Holdings acquired all of Color Tile's common stock. Various employees, including Color Tile management, owned Class C ("non-voting") shares in CT Holdings, amounting to an 8% equity stake in the company. A number of affiliated companies owned all of the Class D ("voting") shares in CT Holdings. The voting shareholders fell into two categories: 1) four Cayman Island companies which collectively owned 20% of CT Holdings' equity and 28% of the voting stock: Corporate Equity Limited ("CEL"), Acquisition Equity Limited ("AEL"), Funding Equity Limited ("FEL"), and Planning Equity Limited ("PEL"); and 2) three "Tile" companies which collectively owned 72% of CT Holdings' equity and each of which owned 24% of the voting stock: Tile Capital Limited, 99% of the stock of which was owned by Elias N. Hallak, the co-COO of SA; Tile International Limited, 99% of the stock of which was owned by Michael L. Merritt, the co-COO of SA; and Tile Equity Limited, 99% of the stock of which was owned by Nemir A. Kirdar, the President and CEO of SA.2
In 1993, American Blind Factory ("ABF"), a family-run private company that sold blinds and wallpaper through direct-response marketing and retail stores, was offered for sale. Donaldson, Lufkin and Jenrette ("DLJ"), retained by ABF to assist with the sale, contacted Color Tile as a potential strategic buyer. There were five written offers for ABF, ranging from $68 million to $96 million. On behalf of Color Tile, III submitted an all-cash bid of $85 million,3 subject to due diligence. This bid was accepted.
In September 1993, after the completion of some due diligence, the Color Tile board met formally and discussed the potential acquisition of ABF. At this time, Color Tile's board consisted of five members: Daniel Gilmartin (CFO); Eddie Lesok (CEO); Larry Nagle (President); Walter Loeb (an outside director formerly retained by III as an independent consultant); and Paul Soldatos (director and officer of III).
In October 1993, Color Tile filed a Registration Statement on Form S-1 in connection with a proposed offering of $200 million in Senior Notes; first and second amendments to this registration statement were filed in November and December 1993, respectively. On December 10, 1993, Color Tile issued a Prospectus in connection with its proposed offering of Senior Notes.
Color Tile did not acquire ABF directly because the necessary financing and SEC and bank approvals could not be arranged within the time period set by DLJ. Accordingly, the Investcorp Group agreed to supply the financing needed for the transaction by creating ABF Acquisition Corp. ("ABFAC") to purchase ABF. Three III officers, Hedley, Soldatos, and Tung, were installed as the officers and directors of ABFAC. ABFAC was capitalized with a $15 million capital contribution from its shareholders4 and a $70 million loan from Chemical Bank unconditionally guaranteed by SA. On November 4, 1993, ABFAC paid $74,935,217 for ABF, and on November 5, 1993, ABFAC incurred various additional fees of $4,287,500 in connection with the acquisition.5 ABFAC then granted Color Tile an option to purchase ABF.
In addition to the ABF assets, on November 4, 1993, ABFAC also purchased 24 retail stores which operated under the names "Mrs. Kay's" and "Kay and Kay Tile Depot." On the same date, the Color Tile board approved, as "in the best interests of [Color Tile] and its stockholders," the purchase of these retail assets from ABFAC for $1,754,000.
On December 7, 1993, Color Tile created a wholly-owned subsidiary, ABWF, for the purpose of exercising the option to purchase ABF from ABFAC. On December 15, 1993, Color Tile's board executed a unanimous written consent approving, as "in the best interests of [Color Tile] and its stockholders," the assignment of Color Tile's option to purchase ABF to ABWF. On December 17, 1993, Color Tile's board executed another written consent approving, as "in the best interests of [Color Tile]," an $80 million capital contribution to ABWF in order to facilitate the purchase of ABF. ABWF then paid $80 million to ABFAC for ABF. ABFAC distributed $15 million of the $80 million to the ABFAC shareholders and repaid the remaining $65 million balance on the Chemical Bank loan which had been unconditionally guaranteed by SA. Color Tile stated in its 1993 10-K that the $80 million purchase price, including fees and expenses, "reflects the same price paid by ABF[AC] for the ABF assets, adjusted to reflect [$4.3 million] payable to certain Investcorp affiliates ... and the reimbursement of transaction costs incurred in connection with such acquisition."
Ultimately, the ABF assets were not as profitable as Color Tile's projections had predicted. In the Fall of 1994, Color Tile received an additional $29 million term loan from its bank group. In June 1995, Investcorp entities lent $15 million to Color Tile (which they later contributed to Color Tile's capital); in September and October 1995, Investcorp entities made an additional $15 million contribution and arranged an additional $15 million loan from Chemical Bank. Nevertheless, on January 24, 1996, Color Tile and CT Holdings each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
The plaintiff in this action is the Official Committee of the Unsecured Creditors which was appointed in the 1996 bankruptcies of Color Tile and CT Holdings. The Committee is empowered to prosecute certain claims on behalf of the estates of Color Tile and CT Holdings pursuant to a September 17, 1997 Order of the United States Bankruptcy Court for the District of Delaware which approved the Global Settlement Agreement among Color Tile, CT Holdings, the Committee, and other entities.
Summary Judgment is authorized when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The judge's role in summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). This requires that the party opposing summary judgment "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time...
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