Gleneagles Case Is Noted for Hoffa, Fear It Caused

A case known as Gleneagles is a milestone in fraudulent conveyance litigation, not just because of the precedents it set, but because of the role played by the late labor leader James R. Hoffa.

Hoffa was one of three men who in 1973 formed a company called Great American to buy the Raymond Group, troubled owner of extensive coal properties in Pennsylvania.

Hoffa was a secret partner whose participation in the deal was revealed after the buyers tried unsuccessfully to obtain financing for the leveraged buyout from the infamous Central States Pension Fund of the International Brotherhood of Teamsters. Apparently, Hoffa’s influence as the former longtime president of the union was insufficient to sway the pension fund’s lawyers, who, even then, were skittish about the potential for fraudulent conveyance.

The bulk of the more than $8 million borrowed by Hoffa and partners to finance the deal (a paltry sum by the standard of the 1980s mega-LBOs) went to buy out the previous shareholders. As in the LBOs to come, the buyers put in very little of their own money and used the company’s own assets as security for the loan.

Soon the company fell behind in property taxes and payments to its creditors; it shut down some mining operations and was unable to make its loan payments.

The case was complicated almost beyond untangling by a network of borrowing and lending companies and by a series of deals that transferred properties and mortgages to yet other companies. Eventually, the federal government--still owed taxes from the days when the original Raymond Group was struggling--sued to undo the buyout and the successive transactions.

In 1986, an appeals court upheld an earlier decision that declared the deal a fraudulent conveyance, invalidated the claims of the LBO lenders to Raymond Group assets and reversed later transfers of the firm’s holdings. Raymond Group creditors, including the federal government, were put in line ahead of Great American’s creditors for what was left of the estate.

Lawyers quickly realized that Gleneagles held important ramifications for the spate of leveraged buyouts, takeovers and mergers that were making corporate raiders, investment bankes and junk bond purveyors rich.

Gleneagles was “the case that focused everybody’s attention on the potential application of fraudulent conveyance laws to leveraged buyouts,” said Robinson Lacy, a Manhattan lawyer representing Goldman, Sachs & Co. and 10 other defendants in suits related to the LBO and bankruptcy of Kaiser Steel.

Lacy said he and “a few dozen other attorneys . . . all read the case when it came out, and thought something was scary there.”