Revco Bankruptcy Report Holds Buyout Parties Liable

The court-appointed examiner in the Revco DS bankruptcy case, in his final report filed on Wednesday, has sent a strong message to the investment community that financiers can be held liable for failed leveraged buyouts.

The examiner, Barry L. Zaretsky, said the $1.25-billion leveraged buyout of Revco in 1986 “is likely to have left the company with insufficient capital to conduct its business and to meet its known obligations, and may have left the company insolvent.”

Such transactions are grounds for fraudulent conveyance, a provision in the law that could allow creditors to undo a buyout and force those who participated in it--including bankers, advisers, bondholders and stockholders--to repay their fees and/or forgo their claims to the company’s remaining assets.

Zaretsky said in the case of Revco, the holders of junk bonds used to finance the buyout of the Ohio-based drug store chain could be pushed behind trade and other creditors in the line for pay-backs from Revco. If the bankruptcy court follows Zaretsky’s view, it would be the first attempt to attach liability to bondholders.

“The report firms up the view that some people have had that there is a strong fraudulent conveyance claim here and one way or another, the case is going to have to take that into account,” said Zaretsky, a professor at Brooklyn Law School and member of the New York law firm Kelley Drye & Warren.

In addition, he said, he expects his findings to have “widespread implications” for other cases in which a company went under shortly after changing hands in a debt-financed buyout. In several other cases of bankrupt companies, creditors have filed fraudulent conveyance suits, claiming the buyout was illegal because the transfer of the company’s assets to others fatally weakened the company and deprived creditors of their claims to the assets.

In the Revco case, creditors have agreed to set aside their fraudulent conveyance suit against thousands of individuals and companies involved in Revco’s buyout, including the junk bond holders, if their plan of reorganization for Revco is accepted and implemented.

But the plan has yet to be adopted and Zaretsky said he is “not optimistic that the proposed plan will be confirmed and implemented promptly.”

An attorney for the creditors declined comment on Zaretsky’s assessment of the plan’s status.

Revco filed for bankruptcy protection in 1988.