In re Ashinc Corp.

640 B.R. 1

IN RE: ASHINC CORPORATION, et al., Debtors.

Catherine E. Youngman, Litigation Trustee for ASHINC Corporation, et al., as Successor to the Official Committee of Unsecured Creditors of Ashinc Corporation, and Its Affiliated Debtors, Plaintiff,

BDCM Opportunity Fund II, LP, Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P., Intervenors,

v.Yucaipa American Alliance Fund I, L.P., and Yucaipa American Alliance (Parallel) Fund I, L.P., Defendants.

Catherine E. Youngman, Litigation Trustee for Ashinc Corporation, et al., as Successor TO BDCM Opportunity Fund II, LP, Black Diamond CLO 2005-1 Ltd., Spectrum Investment Partners, L.P., Black Diamond Commercial Finance, L.L.C., as co-administrative agent, and Spectrum Commercial Finance LLC, as co-administrative agent, Plaintiff,

v.Yucaipa American Alliance Fund I, L.P., and Yucaipa American Alliance (Parallel) Fund I, L.P., Defendants.

Case No. 12-11564 (CSS) (Jointly Administered)

Adv. Pro. No. 13-50530 (CSS)

Adv. Pro. No. 14-50971 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed May 2, 2022

Seth A. Niederman, Fox Rothschild LLP, Wilmington, DE, Adam G. Landis, Kerri K. Mumford, Landis Rath & Cobb LLP, Wilmington, DE, Learon John Bird, Stoel Rives, LLP, Portland, OR, for Plaintiff.

Laurel D. Roglen, Ballard Spahr LLP, Wilmington, DE, Laura Davis Jones, Peter J. Keane, Pachulski Stang Ziehl & Jones LLP, Wilmington, DE, David M. Bertenthal, Pachulski Stang Ziehl & Jones LLP, San Francisco, CA, Patricia L. Glaser, Gali Grant, Matthew Bernstein, Glaser Weil Fink Howard Avchen & Shapiro, Los Angeles, CA, for Defendant.

Christopher S. Sontchi, United States Bankruptcy Judge

"How did you go bankrupt?" Bill asked.

"Two ways," Mike said. "Gradually and then suddenly."

Ernest Hemingway, The Sun Also Rises

At 5:45 pm on May 17, 2012, BD/S filed an involuntary Chapter 11 petition against Allied.¹ It was a sudden culmination of two years of negotiations surrounding Allied's insolvency.

Allied, which was a unionized hauler for the major automobile manufacturers, had been in default of its 1st and 2nd lien secured debt since 2008, i.e., for 4 years. The 2008 financial crisis, which was particularly hard on the automotive business, took newly reorganized Allied to EBITDA in excess of negative $29 million in 2011. But, Allied had an eager suitor in a competitor, Jack Cooper Transport or JCT, and by 2011-2012 the automotive business had begun to emerge from the financial crisis.

Allied's capital structure was dominated by Yucaipa, which had funded Allied's exit from a previous bankruptcy. Yucaipa owned a majority of the 1st lien secured debt (where it was improperly serving as requisite lender), 2nd lien secured debt, and the equity. Yucaipa also controlled the board. Black Diamond and Spectrum (collectively, "BD/S") were large minority holders of Allied's secured debt. It is law of the case in this litigation that, at all relevant times, Yucaipa owed fiduciary duties to Allied's creditors, including BD/S.

By no later than May 2011, Allied's board became aware that JCT desired to acquire the assets of Allied. Rather than engaging in negotiations with JCT, the board deferred to Yucaipa, acting in its capacity as the dominant lender. That was a breach of fiduciary duty by the board and, thus, Yucaipa. The rest of this unfortunate story may have been avoided if the board had simply fulfilled its clear fiduciary obligation to engage in negotiations with JCT on behalf of the company.

Nonetheless, Yucaipa began negotiations with JCT over an integrated, two-step transaction in which JCT would purchase Yucaipa's debt and then credit bid that debt for Allied's assets in a 363 sale in Allied's pre-negotiated Chapter 11. Perhaps seeing an opportunity to divide and conquer, JCT also engaged in parallel negotiations with BD/S over the purchase of its debt for the same purpose. While Yucaipa and BD/S were aware of each other's negotiations with JCT they were mostly unaware of the details, including the price offered for each other's debt.

What followed from 2011 through mid-2012 were negotiations among JCT on the one hand and Yucaipa and BD/S (acting separately) on the other hand. These negotiations took the form of exchanged term sheets and never proceeded to a form agreement let alone definitive documentation. Indeed, no term sheet was ever agreed upon. Concurrently, Yucaipa's principal, Ron Burkle, and Black Diamond's principal, Steve Deckoff, engaged in discussions regarding, among other things, Allied, through two in-person meetings and occasional phone calls.

While prices varied between term sheets, the Yucaipa negotiations generally involved JCT paying approximately 110% to 115% of par for Yucaipa's 1st lien debt and $1 for the 2nd lien debt. There were several other deal points. Two important ones were: (1) varying conditions based on Allied's financial condition that reflected JCT, which had not performed due diligence, was not fully aware of Allied's poor financial condition; and (2) a condition that required BD/S and CIT to consent to the Yucaipa deal. Similarly, the prices in the BD/S term sheets varied from 100% of par to 60-70% of par with the prices dropping as negotiations progressed and the price Yucaipa demanded for its own secured debt increased - the negotiations were inextricably linked as any increase in Yucaipa consideration led to a concomitant drop in consideration to BD/S. The JCT offers to Yucaipa and BD/S, which were subject to numerous conditions, implied an enterprise value of Allied of approximately $250 million.

Alarmed with the discrepancy between prices, although not aware of the precise figures, in early 2012, BD/S changed tactics and began to put pressure on Yucaipa and Allied to ensure receipt of equal and ratable treatment with Yucaipa for the purchase of debt by JCT. For example, BD/S sued Yucaipa in New York state court, asserting that Yucaipa was improperly serving as Allied's requisite lender for the first lien secured debt, and BD/S's lawyer sent two letters "reminding" the Allied board of its fiduciary duties. This culminated in a telephone conference on May 14th between representatives of Yucaipa and BD/S, which was the first time the parties had discussed the JCT acquisition other than in two high-level dinner meetings between Messrs. Burkle and Deckoff.

At that telephone conference, BD/S proposed to Yucaipa that all secured lenders receive equal and ratable treatment for the purchase of their debt. Yucaipa neither agreed nor disagreed to such treatment at the meeting. A subsequent telephone conference was held on May 15th, which ended with the parties’ agreement that BD/S's lawyer would draft a legal document incorporating BD/S's demand. The parties also agreed that neither would put Allied into bankruptcy prior to May 17th at 12 noon Eastern time.

That draft legal document was prepared by BD/S's lawyer and it was sent to Yucaipa via email on May 16th with a demand that comments be received by the expiration of the bankruptcy standstill agreement on May 17th at 12 noon. That day the parties agreed to extend the standstill and response deadline to 5:00 p.m. Yucaipa's representative stated that Mr. Burkle would call Mr. Deckoff by that time. No substantive response one way or the other was made to BD/S's draft legal document. Although Mr. Burkle testified that he called, it was unclear whether he meant that he did so prior to 5:00 p.m. Mr. Deckoff, who had Mr. Burkle's private number, which he had called previously, did not call Mr. Burkle, and testified that Mr. Burkle did not call him. No telephone records were submitted by either side.

In any event, BD/S filed an involuntary Chapter 11 petition against Allied on May 17^th at 5:45 p.m. Litigation ensued among the parties, inside and outside bankruptcy, which ultimately culminated in this trial in 2022. In late 2013, JCT purchased Allied's assets for $135 million.

In this trial, the litigation trustee of Allied's estate has asserted that Yucaipa's conduct in 2011-2012 constituted a breach of fiduciary duty that harmed Allied and its creditors and resulted in damages of $158.6 million constituting the difference between the consideration set forth in a December 2011 term sheet and the ultimate purchase price JCT paid for Allied's assets in 2013.² The Court will find as follows:

1. At all relevant times, Yucaipa and the Allied board owed fiduciary duties to Allied's creditors, including BD/S.

2. When the Yucaipa controlled board was informed in May 2011 that JCT wanted to buy Allied's assets and neglected to engage in negotiations but deferred to Yucaipa the board and, thus, Yucaipa breached their fiduciary duties. Moreover, Yucaipa breached its fiduciary duties in its negotiations with JCT because it was seeking a higher price for its debt than that offered to BD/S.

3. Plaintiff has failed to prove damages because their damages case is unreasonable, arbitrary, and flawed for a number of reasons, including, without limitation, the use of the December 2011 term sheet, which was highly contingent and was clearly used by plaintiffs’ expert solely to maximize damages, and the unreasonable assumption of only $5 million in bankruptcy fees to consummate a pre-negotiated sale in bankruptcy.

FINDINGS OF FACT AND CONCLUSIONS OF LAW³

On May 4, 2021, the Court issued a detailed 117-page Opinion on the parties’ cross-motions for summary judgment [See Adv. Pro. 13-50530, D.I. 825 (the "Summary Judgment Opinion")] in the above-captioned Adversary Proceedings [the "Adversary Proceedings" are Adv. Pro. 13-50530 (the "Estate Action") and Adv. Pro. 14-50971 (the "Lender Action"].⁴ To the extent necessary, the findings will reference only docket numbers in Adv. Pro. 13-50530, unless otherwise indicated, against Defendants Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. (together, "Yucaipa"). The Court subsequently entered Judgment in favor of the Trustee on several...