Orchard Trustee's Suit Over $310M Payout Survives (Law360)
By Martin Bricketto
A federal judge on Thursday refused to toss a suit by a trustee for Orchard Brands Corp. subsidiaries looking to claw back a $310 million acquisition-related dividend from Golden Gate Capital Corp. funds that allegedly caused the companies' insolvency, calling a primary dismissal argument illogical.
Looking to kill the suit's fraudulent transfer claims, the Golden Gate funds, which own a controlling stake in Orchard, and other defendants argued that the subsidiaries didn't control that money because credit agreements associated with the retailer's 2007 leveraged buyout of Blair Corp. required them to pay the dividend.
The lenders wired the money directly to Orchard, meaning the subsidiaries never had possession of the money, the funds contended. But U.S. District Judge Joseph E. Irenas said Thursday that the dividend was formally issued by Haband Co. LLC, a unit of Orchard subsidiary Appleseed's Intermediate Holdings LLC Inc.
"It truly defies logic to argue that Haband did not have an interest in property in the $310 million dividend Haband itself issued," the judge said.
The funds paid themselves and their investors the dividend after arranging the leveraged buyout, which heaped $650 million in secured debt onto the company, according to the adversary proceeding that the litigation trustee for the Orchard Brands units, including Appleseed's, filed in April.
"As alleged, the (private equity parties) diverted nearly half of the loan proceeds to themselves, which left the debtors teetering on the brink of insolvency," Judge Irenas said Thursday. "It would be paradoxical to allow the PE parties to offer debtors' property as collateral, abscond with the proceeds of the loan in the form of a dividend, and yet declare that the debtors had no interest in property."
Besides preserving the fraudulent transfer claims, Judge Irenas also rejected a bid by Orchard minority shareholders to dismiss corporate waste claim and put off a decision on whether state law claims were barred under a three-year statute of limitations.
Attorneys for the parties were not immediately available for comment Thursday.
The debtors filed a prepackaged Chapter 11 plan in January 2010, saying declining sales combined with a massive debt load — mostly incurred in the leveraged buyout — forced the company to seek court protection. The plan, which slashed $420 million in debt, was confirmed April 14, but unsecured creditors were left out in the cold.
The suit represents the only chance at a meaningful recovery for unsecured creditors and, in fact, the committee representing them only agreed to support the plan in return for $2.5 million to fund its investigation and the trust's prosecution of the claims against Golden Gate.
Golden Gate's one-two punch of piling secured debt on Orchard while siphoning the loan proceeds to pay dividends to itself left the debtors with scant capital to run the business and unable to keep up with debt payments, according to the complaint.
The trustee also took issue with multimillion-dollar transaction fees paid to Golden Gate in connection with the leveraged buyout and additional advisory fees forced on the debtors after the transaction.
The trustee is represented by Drinker Biddle & Reath LLP and Cooley LLP.
The Golden Gate defendants are represented by Richards Layton & Finger PA and Milbank Tweed Hadley & McCloy LLP.
Webster Capital funds named as defendants are represented by Carl N. Kunz III of Morris James LLP and David Mr. Fournier of Pepper Hamilton LLP.
The Orchard minority shareholders are represented by Elizabeth A. Sloan, Ian M. Comisky and Earl M. Forte of Blank Rome LLP.
The case is Robert N. Michaelson, as Trustee of the Appleseed's Litigation Trust v. Jeffrey D. Farmer et al., case number 1:11-cv-00807, in the U.S. District Court for the District of Delaware.
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