Matter Of Munford, Inc.
Matter of MUNFORD, INC., a/k/a Majik Market, Debtor.
Danne Brokaw MUNFORD, as Executrix of the Estate of Dillard
Munford; James M. Carroll; Russell Fellows; Joseph W.
Hardin; Jay Rubel; Winston M. Blount; Herbert J. Dickson;
James L. Ferguson; Robert M. Gardiner; Richard K.
Leblond; Andrall E. Pearson; S.B. Rymer, Jr., Shearson
Lehman Brothers, Inc.; DFA Investment Dimensions Group,
Inc.; State Street Bank & Trust Company; PNC Bank,
National Association; Boston Safe Deposit and Trust
Company, Plaintiffs-Appellees,
v.
VALUATION RESEARCH CORPORATION, Defendant,
Munford, Inc., Defendant-Appellant.
No. 94-9046.
United States Court of Appeals,
Eleventh Circuit.
Oct. 28, 1996.
Susan A. Cahoon, Neal S. Berinhout, Kilpatrick & Cody, Atlanta, GA, Kenneth L. Millwood, Nelson, Mullins, Riley & Scarborough, Atlanta, GA, for defendant-appellant.
David E. Bennett, Vedder, Price, Kaufman & Kammholz, Chicago, IL, Edward H. Wasmuth, Jr., Thomas W. Rhodes, Smith, Gambrell & Russell, Atlanta, GA, Leon S. Jones, Joseph J. Burton, Jr., Burton & Anderson, Atlanta, GA, Peyton S. Hawes, Jr., Law Offices of Peyton S. Hawes, Jr., Atlanta, GA, John H. Williamson, Gregory R. Hanthorn, R. Matthew Martin, Jones, Day, Reavis & Pogue, Atlanta, GA, C. Murray Saylor, Ragsdale, Beals, Harper & Seigler, Atlanta, GA, Randall Quinn, Katharine Gresham, Jacob Stillman, SEC, Washington, DC, for plaintiffs-appellees.
Appeal from the United States District Court for the Northern District of Georgia.
Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and
MILLS*, District Judge.
PER CURIAM:
As a matter of first impression in this circuit, we hold that
FACTS
In August 1987, Dillard Munford, the founder and chief executive officer of Munford, Inc., suggested to Munford, Inc.'s board of directors (the board) that it sell Munford, Inc. At that time, Munford, Inc., a public company, operated three specialty retailer stores: Majik Market, a chain of convenience stores; World Bazaar, a chain of stores specializing in imported goods; and Lee Ward's Creative Crafts, an arts and crafts chain. Munford, Inc. also owned a majority interest in United Refrigerator Services, Inc. (URS). Based on Dillard Munford's suggestion, the board retained Shearson Lehman Brothers (Shearson) to evaluаte Munford, Inc.'s financial viability and its fair market value. Following this evaluation, Shearson would make recommendations regarding how to best maximize shareholder value in the event the board decided to sell Munford, Inc.
In September 1987, Shearson presented a written report to the board identifying several selling options. Shearson, for example, opined that a sale of all of Munford's common stock would afford Munford, Inc. the most desirable means of maximizing shareholder value while preserving its financial viability. In contrast, Shearson disfavored a leverage buy-out (LBO) or a leverage recapitalization opining that Munford, Inc. would need all of its internally gеnerated cash flow to fund growth. Consequently, Shearson believed that Munford, Inc. could not carry the heavy debt load associated with a leverage transaction. After reviewing Shearson's report, the board authorized Shearson to prepare an offering memorandum and solicit potential purchasers for Munford, Inc. During this same period of time, Munford, Inc. executed severance contracts with senior officers Dillard Munford, Russell C. Fellows, and James M. Carroll agreeing to pay these officers severance pay in yearly installments upon the closing of the sale of Munford, Inc. In exchange, these officers promised to continue their employment with Munford, Inc. until it secured a purchaser. Despite Shearson's aggressive efforts to solicit potential purchasers of Munford, Inc., no one offered to purchase all of Munford, Inc.'s common stock. Faced with this reality, the board began considering LBO offers.
In January 1988, Deutschman & Co. offered to purchase Munford Inc.'s stock in an LBO. In February 1988, the board tentatively agreed to sell Munford, Inc. to Deutschman, but Deutschman withdrew its offer on March 3, 1988, after performing a due diligence examination. On May 2, 1988, Munford, Inc. sold its Lee Ward's stores to Prudential Bache because it had failed to secure a single purchaser for Lee Ward's stock. Later that month, the board receivеd an offer from the Panfida Group to purchase its Majik and World Bazaar stores for $18.50 per share. On May 23 the board met with its lawyers and Shearson's representatives to consider the Panfida Group's offer. At that meeting, Munford Inc.'s lawyers advised the board that they had consulted with Citicorp and Citicorp confirmed its willingness to work with the Panfida Group. Shearson also advised the board that the Panfida Group had the backing of a company with assets in excess of $60 million. In addition, Shearson's representative stated that he was favorably impressed with the Panfida Group's ability to obtain financing. On June 1, 1988, Phillip Handy, the spokesperson for the Panfida Group, met with the board tо discuss the proposal. During the meeting, Handy informed the board that the Panfida Group had purchased 291,177 shares of Munford, Inc. stock as evidence of its commitment to purchase Munford, Inc. Handy also noted that the Panfida Group intended to put additional capital into the company; however, he also advised the board that Panfida's equity participation would only be as much as Citibank required to finance the purchase.
On June 17, Munford, Inc. sold its stock in URS for $45.5 million and used the proceeds to pay company debt. Also during the month of June, the Panfida Group and Citicorp began a due diligence examination of Munford Inc.'s business records. After discovering рotential environmental liability at some of the Majik stores, the Panfida Group decided to reduce its purchase price from $18.50 a share to $17 a share. The board approved the Panfida Group's new offering price and the proposed merger agreement. The proposed merger agreement required the Panfida Group to create Alabama Acquisition Corporation (AAC) and a subsidiary, Alabama Merger Corporation (AMC). The merger agreement also required the Panfida Group through AAC or AMC to deposit the funds necessary to purchase Munford Inc.'s outstanding stock with Citizens & Southern Trust Company, a financial institution within the securities clearance and settlement system.
Prior to finalizing the merger plan, AAC warranted to the board that the post-merger Munford, Inc. would remain solvent, would have a reasonable amount of working capital, and would have the ability to pay its debts as they came due. After receiving this assurance, Munford, Inc.'s lawyers prepared a detailed proxy statement for Munford, Inc.'s 3,100 shareholders outlining the merger agreement.1 On October 18, 1988, the shareholders approved the merger plan. As provided in the merger agreement, each share of common stock was converted into the right to receive the merger price of $17 per share and extinguished the shareholders' ownership interest in Munford, Inc. The Panfida Group retired the 291,177 shares it purchased prior to the LBO merger without payment. The sale of Munford, Inc. to the Panfida Group closed on November 29, 1988. Thirteen months after the LBO transaction, on January 2, 1990, the post-Munford Corporation filed a Chapter 11 case in bankruptcy court.
PROCEDURAL HISTORY
On June 17, 1991, Munford, Inc. filed an adversary proceeding in bankruptcy court in the Northern District of Georgia on behalf of itself and unsecured creditors pursuant to
In Count I of Munford, Inc.'s complaint, it asserts fraudulent conveyance claims against two of Munford, Inc.'s largest former shareholders, the DFA Investment Dimensions Group, Inc. and Trustees of the DFA Group Trust. In Count I, Munford, Inc. also asserts fraudulent conveyance claims against former directors and officers who received payments for their Munford, Inc. shares in the LBO.2 In Counts II and IV, Munford, Inc. asserts breach of fiduciary duty, negligence, mismanagement, and waste of corporate assets claims against the officers and directors. In Count III, Munford, Inc. asserts that the directors violated Georgia's share repurchase and distribution stаtutes in approving the LBO transaction. In Count V, Munford, Inc. asserts that the severance payments made to Dillard Munford, Fellows, and Carroll constituted fraudulent conveyances. In Count VI, Munford, Inc. claims that Shearson breached its fiduciary duty. Finally, in Count IX Munford, Inc. claims that Shearson aided and abetted the directors and officers' alleged breaches of fiduciary duty.
The shareholders, directors, officers, and Shearson (collectively appellees) filed motions for summary judgment contending that each of Munford, Inc.'s claims failed as a matter of law. On April 5, 1994, the bankruptcy court filed its proposed findings of fact and conclusions of law recommending that the district сourt grant Shearson's motion for summary judgment. In a separate proposed findings of fact and conclusion of law, the bankruptcy court recommended that the district court deny the shareholders, officers, and directors' motions for summary judgment. The district court adopted the bankruptcy court's recommendation in part granting summary judgment in favor of Shearson. The district court also adopted the bankruptcy court's recommendation with respect to Count III and denied the directors' motion for summary judgment on the distribution statute claim. The district court, however, rejected the bankruptcy court's recommendation as to Munford, Inc.'s claims against the shareholders, directors, and officers with respect to Counts I, II, and IV, and granted summary judgment on those counts on August 4, 1994.
On August 26, 1994, the district court amended its order, pursuant to
CONTENTIONS
Munford, Inc. raises four contentions. First, Munford, Inc., contends that the district court erred in concluding that the LBO payment shareholders received for their shares constituted a settlement payment within the meaning of
Appellees contend that the district court properly granted summary judgment in their favor on each of the claims.
ISSUES
We address the following issues: (1) whether the LBO payments received in exchange for shares constituted a settlement payment within the meaning of
DISCUSSION
A. LBO Payments
We review the grant of summary judgment de novo. Orlando Helicopter Airways v. United States,
Pursuant to
Notwithstanding
In this case, the district court entered summary judgment in favor of the shareholders on Munford, Inc.'s fraudulent conveyance claim finding that the LBO payments Munford, Inc. made to the shareholders constituted settlement payments within the meaning of section 741(8). See
The court concludes that whether the LBO payments qualify as
True, a
Importantly, a trustee may only avoid a transfer to a "transferee." See
B. Breach of Fiduciary Duty and Related Claims
We next address Munford, Inc.'s contention that the district court erred in granting summary judgment in favor of the officers and directors on Munford, Inc.'s claims of breach of fiduciary duty, negligence, mismanagement, and waste of corporate assets.
Section 14-2-152.1(a)(1) of the Georgia Code requires directors and officers of companies to discharge their duties in good faith and with the care of an ordinary prudent person. Munford, Inc. contends that the district court erred in concluding that no disputed material facts existed as to whether the directors and officers discharged their duties in good faith and with the cаre of an ordinary prudent person. Specifically, Munford, Inc., argues that substantial evidence supports its contention that the directors and officers approved the LBO without considering the economic effect of the transaction upon the corporation in violation of section 14-2-152.1(a)(1). In support of this argument, Munford, Inc. makes two assertions. First, Munford, Inc. asserts that the officers and directors disregarded Shearson's September 1987 written report disfavoring LBO transactions.6 Second, Munford, Inc. asserts that officers and directors disregarded Deutschman's reasons for refusing to proceed with its planned purchase of Munford, Inc.
In addition, Munford, Inc. argues that Article 9 of its Articles of Incorporation creates a private right of action on behalf of creditors independent of section 14-2-152.1(a)(1). Munford, Inc. notes that Article 9 requires the directors and officers to give due consideration to " 'the extent to which the assets of the corporation will be used' for financing and 'the social, legal, and economic effects of the transaction on the employees, customers, and other constituents of the corporation.' " Based on this language, Munford, Inc. asserts that directors and officers have a higher duty of care than imposed under state law.
The directors and officers contend that they discharged their duties in good faith and with the care of an ordinary prudent person. The directors and officers also argue that they made an informed judgment when they decided to accept Panfida's LBO proposal. They stress that they hired Shearson to perform a financial assessment of Munford, Inc., consulted attorneys regarding their duties to the company, including their duties under the Articles of Incorporation throughout their decision-making process, and that at all times during their service to Munford, Inc., the company was solvent. They therefore argue that in deciding whether to sell Munford, Inc. they had an unqualified duty to maximize shareholder value. With respect to Munford, Inc.'s post-LBO financial stability, the directors and officers argue that Citicorp's decision to finance the LBO merger and AAC's warranty--that post-LBO Munford, Inc. would remain solvent, have a reasonable amount of working capital, and have ability to pay its debt--led them to believe that Munford, Inc. could carry the heavy load associated with a leveraged transaction. Finally, the directors and officers contend that Article 9 did not establish a fiduciary duty greater than under state law or create a private right of action on behalf of creditors. Although Article 9 provides that directors give due consideration to social, legal, and economic effects of a transaction on employees, customers, and other constituents of the corporation, the directors and officers argue that this provision does not identify creditors as persons to whom due consideration is owed. The directors and officers therefore argue that a constituency's interest is only relevant when the consideration of the constituency also benefits the shareholders.
In determining whether directors and officers have satisfied their statutory duty, Georgia courts apply the business judgment rule. See Millsap v. American Family Corp.,
C. Severance Contracts
The district court also granted summary judgment in favor of the officers and directors on Munford, Inc.'s fraudulent conveyance claims. In its complaint, Munford, Inc. alleged that the severance payments it made to Dillard Munford, Fellows and Carroll lacked consideration, and therefore constituted fraudulent conveyances under Georgia law.7 In order for Munford, Inc. to establish a fraudulent conveyance claim under Georgia law, it must show: (1) a conveyance of property; (2) valuable consideration; and (3) that it was insolvent at the time of the conveyance or that the conveyance rendered it insolvent. Brown,
The distriсt court entered summary judgment finding that valuable consideration in the form of the officers' promises to continue employment through the closing of the sale of Munford, Inc. supported the severance payments. Munford, Inc. contends that the district court erred in concluding that Munford, Inc. received valuable consideration in exchange for the severance contracts. Munford, Inc. argues that Dillard Munford's testimony refutes the finding that Dillard Munford's promise constituted valuable consideration because he stated in his deposition testimony that he would have remained with the company through closing in spite of his severance contract. Based on this admission, Munford, Inc. asserts that all of the severance payments constituted gifts rewarding these officers for past services for which they had already been paid.
Dillard Munford, Fellows, and Carroll respond to Munford, Inc.'s arguments asserting that their existing severance contracts each arose due to preexisting severance contracts executed in 1979 or earlier. They also argue that their continued services to the company--beginning with Munford, Inc.'s search in 1987 for a single purchaser for its outstanding stock and ending in 1988 when Munford, Inc. closed the LBO transaction with the Panfida Group--provided sufficient consideration for the severance payments. Specifically, they argue that they provided general corporate management services, advice, strategy, and guidance to Munford, Inc. during the relevant period.
We conclude that Munford, Inc.'s argument lacks merit. Georgia courts hold that "valuable consideration is founded on money or something convertible into money, or having value in money." Stokes v. McRae,
D. The "Aiding and Abetting" Claim
The last issue we address is whether the district court erred in concluding that Munford, Inc.'s claim of aiding and abetting a breach of fiduciary duty against Shearson failed as a matter of law. Munford, Inc. urges this court to recognize a cause of action for aiding and abetting a breach of fiduciary duty under Georgia state law, arguing that Georgia courts would recognize the tort of aiding and abetting a breach of fiduciary duty. Such an action, Munford, Inc. contends, would require a showing of (1) a fiduciary duty on the part of the primary wrongdoer, (2) a breach of fiduciary duty, (3) the knowledge of the breach by the alleged aider and abettor, and (4) the aider and abettor's substantial assistance or encouragement of the wrongdoing. Munford, Inc. argues that it has satisfied this showing. Specifically, Munford, Inc. alleges that Shearson aided and abetted the directors' and officers' breach of fiduciary duty when it provided a fairness opinion concerning the Panfida Group's offering price enabling the LBO transaction to go forward. It also asserts that Shearson, based upon its 1987 report, knew that LBO was not financially prudent for Munford, Inc. and knew that Munford, Inc.'s financial condition continued to deteriorate. In support of its argument that this court should recognize an aiding and abetting action, Munford, Inc. notes that Georgia courts have acknowledged an aiding and abetting cause of action in torts involving violence, the sale of unregistered securities, breaches of covenants with employment contracts, and fraudulent conveyances. In response, Shearson argues that the district court correctly held that the "imposition of aider and abettor liability for breaches of fiduciary duty essentially extends fiduciary obligations beyond the scope of the confidential or special relationship" on which the directors' and officers' obligations are based.
In the absence of state law, we are "obliged to resolve the issue of law as the Georgia state court would." Imperial Enterprises, Inc. v. Fireman's Fund Ins. Co.,
CONCLUSION
For the foregoing reasons, we reverse the distriсt court's grant of summary judgment in favor of the shareholders on Munford, Inc.'s fraudulent conveyance claim. We affirm summary judgment on the remaining claims.
AFFIRMED in part; REVERSED in part; and REMANDED for further proceedings.
HATCHETT, Chief Judge, concurring in part and dissenting in part.
I agree with the majority opinion insofar as it concludes that the district court did not err in granting the directors, officers and Shearson summary judgment. I do not agree, however, with the majority's holding that the district court erred in granting the shareholders summary judgment.
In reversing the grant of summary judgment, the majority holds that whether the LBO payments qualify as settlement payments under
Notes
Honorable Richard Mills, U.S. District Judge for the Central District of Illinois, sitting by designation
Munford, Inc.'s shareholders had no dissenter's rights of appraisal under
Count I specifically asserts claims against Dillard Munford, chief executive officer; Russell C. Fellows, president and chief operating officer; James M. Carroll, vice president and secretary; Joseph W. Harden, vice president and treasurer; and J.E. Rubel. Count I also asserts claims against directors Dillard Munford, Fellows, Robert M. Gardiner, Richard K. LeBlond, II, Herbert J. Dickson, Winston M. Blount, S.B. Rymer, Jr., Andrall E. Pearson, and James L. Ferguson
The directors also appeal the district court's denial of their motion for summary judgment on Munford, Inc.'s share repurchase and distribution claim (Count III) in Case No. 94-9216
In support of its position, Munford, Inc. cites Wieboldt Stores, Inc. v. Schottenstein,
For a discussion of this issue, see In re Healthco Int'l Inc.,
In that report, Shearson opined that Munford, Inc. needed all of its internally generated cash flow to fund growth and could not be able to finance increased leverage resulting from financial restructuring
Section 18-2-22 of the Georgia Code provides:
The following acts by debtors shall be fraudulent in law against creditors and others and as to them shall be null and void ... every voluntary deed or conveyance not for a valuable consideration made by a debtor who is insolvent at the time of the conveyance.
Brown v. Citizens & Southern National Bank,