A lawsuit by Crowthers McCall Pattern against New York investor Reginald F. Lewis, alleging fraud in the sale of the home sewing concern, may signal an increase in such litigation by disgruntled buyers seeking compensation for highly leveraged buyouts gone sour, experts say.
The suit, which seeks more than $60 million in damages, contends that in arranging financing for the purchase and, later, the sale of McCall Pattern, Lewis saddled the company with so much debt that McCall Pattern was forced to file for reorganization under the U.S. Bankruptcy Code.
Ironically, in December, the same month that McCall Pattern sought bankruptcy protection, Lewis bought Beatrice International Foods Co. for $985 million, making it by far the largest black-owned business in the country. Lewis is chairman of the firm.
R. S. (Butch) Meily, a spokesman in Lewis’ Paris office, called Crowthers’ 32-page lawsuit “totally without merit.” He pointed out that Lewis would hardly want to bankrupt a company in which he still owns a 20% share.
McCall Pattern officials declined to comment and referred questions to the company’s lawyer, Robert W. Gottlieb, who said the suit was a “legitimate complaint. Many of these LBOs lack financial stability.”
Lawsuits brought by buyers against sellers of highly leveraged companies may become more widespread in the wake of the wave of LBOs sweeping the nation, say some lawyers, who believe that owners may feel that they have little to lose by risking a relatively small amount in legal fees when they already owe creditors millions of dollars.
“It’s increasing with all these leveraged buyouts,” said Ronald J. Gilsen, a law professor at Stanford University. Disappointed buyers often decide that they would like to have paid less for a company than they did, he said. “There’s always a 50-50 chance” that a judge will agree.
Net Worth Dips
Filed in U.S. District Court in New York, the lawsuit also names investors Shearson Lehman Bros. Group and Bankers Trust Co. as well as nine other shareholders and directors of Lewis’ holding company, TLC Group.
TLC Group had bought McCall Pattern for $24.5 million in January, 1984.
In June, 1987, an investor group controlled by John Crowther PLC, a British textile concern, paid TLC $63 million for McCall Pattern. Shearson, TLC, a subsidiary of Shearson Group, and Bankers Trust provided a combined $35 million in short-term loans to Crowther to purchase the McCall stock, according to the lawsuit. The $35-million, 9.75% note issue was sold to Travelers Insurance Co. and Travelers Indemnity Co. in September, 1987.
A year later, Crowthers McCall’s net worth dipped below the minimum required under the note agreement with Travelers, and the notes were declared in default.