Thursday, November 29, 2012

In re Bay Plastics, Inc. case brief (leveraged buyout/fraudulent transfer)

In re Bay Plastics, Inc. (Bankr. CD Cal. 1995)   

Subject:  Leveraged buyout and Fradulent Transfers.

Facts: Shareholders formed debtor Bay Plastic in 1979. They filed for bankruptcy on January 25, 1990. 
-Shareholders sold their stock to Milhous for $3.5 M in cash plus $1.8 M in deferred payments. Milhous didn’t acquire the stock directly. 
-Its subsidiary Nicole Plactics formed its own subsidiary, BPI Acquisition Corp.(“BPI”), to take ownership of the BP stock. Formally, the parties to the transaction were BPI and the selling shareholders. Milhous put no money into the purchase. 
-Bay Plastics borrowed approximately $3.95 M from defendant BT Comm. Corp. and then caused Bay Plastics to direct that $3.5 M of the loan to be disbursed to BPI. BPI then paid the selling shareholders for their stock. Thus at closing, $3.5 M of the funds paid into escrow by BT went directly to the selling shareholders. BT received a first priority security interest in all the assets of Bay Plastics. 
-BT received it all and nothing is left for the unsecureds. All of the debt except for $500k owed to BT was a result of the LBO. The shareholders knew about the financing. 
Issue: Is the leveraged buyout that took place in this case a fraudulent transfer?

Holding: Yes.  The transaction may be avoided as a constructive fraudulent transfer under the Cal. UFTA on which the debtor relies pursuant to B.R. Code §544(b), and the debtor is entitled to recover against the selling shareholders.

Under UFTA §5 for a constructive fraudulent transfer rendering the debtor insolvent. Elements of a cause of action under this statute are as follows: the debtor 1) made a transfer or incurred an obligation, 2) without receiving a reasonably equivalent value in exchange, 3) which rendered the debtor insolvent (or debtor already insolvent), and 4) which is attacked by a pre-transaction creditor.

Analysis: Should the court collapse the transaction into one integrated transaction? Is it a straight sale without an LBO? If there is evidence that the parties knew or should have known that the transaction would deplete the assets of the company, the Court should look beyond the formal structure and collapse the transaction. Also, goodwill cannot be retained in Bankruptcy. Therefore, debtor is insolvent.

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