Kipperman v. Onex Corp.

411 B.R. 805

Richard M. KIPPERMAN, Plaintiff, v. ONEX CORPORATION, et al., Defendants.

Civil Action No. 1:05-CV-1242-JOF.

United States District Court, N.D. Georgia, Atlanta Division.

August 13, 2009.

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Benjamin Aaron Lee, Daniel James King, Catherine M. O'Neil, King & Spalding, LLP, Atlanta, GA, Catherine Steege, Avid M. Greenwald, Joel Pelz, Jenner & Block, Chicago, IL, for Plaintiff.

Alan W. Kornberg, Christopher D. Frey, Maria T. Vullo, Moses Silverman, Philip G. Barber, Samuel E. Bonderoff, Stacey A. Shortall, Paul Weiss Rifkind Wharton & Garrison, New York, NY, Dan Foster Laney, III, Richard H. Sinkfield, Phillip S. McKinney, Rogers & Hardin, Thomas Samuel, Michael Peter Carey, Bryan Cave Powell Goldstein, Constance Melissa Ewing, Atlanta, GA, Kenneth A. Gallo, Paul Weiss Rifkind Wharton & Garrison, LLP, Washington, DC, for Defendants.

OPINION AND ORDER

J. OWEN FORRESTER, Senior District Judge.

  I. Background ................................................................. 814
     A. The Parties ............................................................. 815
     B. The Acquisitions or LBOs ................................................ 816
        1. ABCO Acquires Windsor Door Using the Credit Agreement ................ 816
        2. Onex Acquires a Majority Interest in ABCO in May 1999 ................ 817
            i. The Acquisition of ABCO through ABCO Holdings .................... 817
           ii. The Financing of the ABCO LBO by the Lenders ..................... 818
          iii. The Management Agreement between ABCO and Onex ................... 820
        3. ABCO Acquires Republic ............................................... 821
            i. The Acquisition .................................................. 821
           ii. The Financing .................................................... 821
        4. ABCO Acquires Jannock ................................................ 822
            i. The Acquisition .................................................. 822

           ii. The Financing .................................................... 822
     C. The Bankruptcy .......................................................... 823
     D. Procedural History ...................................................... 824
 II. Discussion of Plaintiffs Claims ............................................ 825
     A. Fraudulent Conveyance Counts I, III, VII, and IX ........................ 826
        1. Plaintiffs Standing to Bring Claims Related to Transfers Before
             December 1999 ...................................................... 830
        2. ABCO Acquisition Claims and Statute of Limitations ................... 832
        3. Insolvency/Financial Condition and Reasonably Equivalent Value ....... 835
            i. Proving Insolvency or Poor Financial Condition ................... 835
           ii. Proving Lack of Reasonably Equivalent Value ...................... 837
          iii. Admissibility of Logue's Expert Testimony under Rule 702 ......... 838
               a. Standards for Admission of Expert Testimony under Rule
                    702 ......................................................... 842
               b. Logue's "Zone of Insolvency" Testimony ........................ 844
               c. Logue's Methodology for Calculating DCF Variables ............. 845
               d. Logue's Calculation of Reasonably Equivalent Value ............ 849
           iv. Showing Insolvency or Lack of Reasonably Equivalent Value ........ 850
               a. Credit Agreement Transfers .................................... 851
               b. Management Agreement Transfers ................................ 852
        4. Proving Actual Fraud ................................................. 853
        5. Conclusion on Fraudulent Transfer Claims ............................. 859
     B. Preferences Count XVII .................................................. 859
        1. General Law with Respect to Preferences under 11 U.S.C. § 547 ... 860
        2. Plaintiff's Prima Facie Case for the Five Management Agreement
             Transfers at Issue in its Motion for Partial Summary Judgment ...... 860
        3. Plaintiff's Prima Facie Case for Tranche B Preference Transfers ...... 863
        4. Defendants' Affirmative Defenses under Section 547(c) ................ 864
     C. Breach of Fiduciary Duty Count X and XI ................................. 867
     D. Aiding and Abetting Breach of Fiduciary Duty Count XI and Civil
          Conspiracy Count XII .................................................. 869
     E. Unjust Enrichment Count XIX ............................................. 872
     F. Lender Liability Count XVI .............................................. 873
III. Discussion of Defendants' Defenses as to Plaintiffs Remaining Claims ....... 873
     A. The Parties' Cross Motions on "Cap" Defense or Defense 4 ................ 874
        1. The Absolute Priority Rule Does Not "Cap" the Trustee's Recovery ..... 875
        2. Section 550 Does Not "Cap" the Trustee's Recovery .................... 876
        3. Judicial Estoppel Does Not "Cap" the Trustee's Recovery .............. 878
     B. The Parties' Cross Motions on the Doctrine of In Pari Delicto ........... 879
     C. Defendants' Claim that the Court Lacks Personal Jurisdiction over
          Gerald Schwartz ....................................................... 882
     D. Plaintiff's Request to Establish Certain "Transfers" .................... 884
     E. Plaintiffs Motion to Bar Defenses 7, 11, 12, 27 and 28 .................. 885
 IV. Conclusion ................................................................. 887

The instant matter is before the court on the Trustee's Motion for Partial Summary Judgment [620]; the Onex Defendants' Motion for Partial Summary Judgment [621]; and Plaintiff's Motion for Leave to File Post-Hearing Submission on Daubert Issues [639].

I. Background

The instant action arises out of Magnatrax Corporation ("Magnatrax") and its subsidiaries' (collectively "the Debtors") bankruptcy in 2003 in the Delaware Bankruptcy Court following a number of leveraged buyouts ("LBOs") involving Magnatrax, its predecessor entity American Building Company ("ABCO") and Onex Corporation ("Onex").

A. The Parties

The Plaintiff in this matter is Richard M. Kipperman, not individually but solely in his capacity as Trustee for the Magnatrax Litigation Trust ("the Trust"). The court will refer to Plaintiff as "the Trustee." The Trust was established during Magnatrax's bankruptcy pursuant to the Litigation Trust Agreement and the Magnatrax Debtors' Fifth Amended and Restated Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code ("the Plan").

The Defendants in this matter include Onex, various entities associated with Onex (referred to collectively as "the Onex entities"), and individuals who serve or have served as officers for Onex or the Onex entities. Onex is a publicly traded private equity firm with its principal place of business in Toronto, Ontario. Onex makes money by buying or acquiring businesses, improving their value and selling them at a profit, and by charging management fees to its subsidiaries. Onex engages in the practice of acquiring businesses through leveraged buyouts. Onex explains its leveraged buyout business model in part in its annual reports as follows:

In completing acquisitions, it is generally Onex's policy to finance a large portion of the purchase price with debt provided by third-party lenders. This debt is assumed by the company acquired and is without recourse to Onex—the Parent Company—or its subsidiaries or partnerships. The foremost consideration, however, in developing a financing structure for an acquisition is to identify the appropriate amount of equity to invest. In Onex's view, that is the amount of equity which maximizes the risk/reward equation for both Onex and the acquired company; in other words the amount which allows the acquired company to not only manage its debt but also have significant financial latitude for business to vigorously pursue its growth objectives.

While we seek to maximize the risk/reward equation in all acquisitions, there is risk that the acquired company will not generate sufficient profitability or cash flow to service its debt requirements. If such circumstances arise, the recovery of Onex's equity and any other investment in that subsidiary is at risk.

The following Defendants are "Onex entities": Onex ABCO Limited Partnership ("Onex LP"), 1354495 Ontario, Inc. ("Ontario"), Onex American Holdings, LLC ("Onex American"), 302733 Nova Scotia, Inc. ("Nova Scotia"), Onex ABCO Finance, LLC ("Onex Finance I"), Onex ABCO Finance II, LLC ("Onex Finance II"), and OMI Partnership Holdings, LTD ("OMI").¹

Gerald Schwartz founded Onex in 1983; he is the company's President, Chief Executive Officer, Chairman of the Board of Directors, and majority shareholder. Schwartz holds the right to elect six out of the ten members of the Board of Directors of Onex Corporation. Christopher Govan, Nigel Wright, and Mark Hilson were at all relevant times Managing Directors of Onex. Hilson and Wright also served as directors of Magnatrax from May 11, 1999 through at least May 12, 1999.² All of these individuals reside in Canada. The court will refer to Onex, the Onex entities, Schwartz, Govan, Hilson, and Wright collectively as the "Onex Defendants."

Magnatrax and its various subsidiary entities including ABCO are not parties to this action; however, they feature prominently in the factual scenario underlying it. The company known as ABCO has been involved in the manufacture and marketing of metal building systems since ...