Advertisement

Security Pacific Unit Wins Appeal of Suit Over LBO : Litigation: The court upholds a decision that no fraud was involved in the 1981 buyout of Jeannette.

Share
TIMES STAFF WRITER

In a victory for lending institutions that financed leveraged buy-outs, a federal appeals court has ruled that Security Pacific Business Credit Inc. did not participate in a “fraudulent conveyance” of Jeannette Corp.

In its ruling Tuesday, the U.S. 3rd Circuit Court of Appeals affirmed a lower court’s finding that the sellers, buyers and lenders--including Security Pacific--in the 1981 buyout of Jeannette did not defraud the creditors of the Pennsylvania glass-making company.

The decision contradicts a 1986 ruling by the same court in a notorious fraudulent conveyance case known as Gleneagles, involving a series of LBO-like transactions. In that case, the court said the buyout left the company too weak to survive--and therefore was a fraudulent conveyance. It held the lenders and others liable.

Advertisement

Attorneys on both sides of the Jeannette case said that Tuesday’s ruling clouds the picture for other cases in which creditors of failed LBOs are suing the buyers and the financial institutions, accountants and investment bankers who put together and profited from the deals.

“People have been waiting to see how this one turns out,” said William F. Lloyd, one of two attorneys at Chicago’s Sidley & Austin who represented the lending company, a subsidiary of the former Security Pacific. “This is in the same jurisdiction, applying the same law, but with a different outcome. So there is not absolute liability for lenders who finance LBOs that fail.”

Coca-Cola Bottling sold Jeannette for $12.1 million to a group of investors led by John Brogan, a Boston-based buyout specialist. Nearly $11.7 million of the deal was financed through loans against the company’s assets.

Within 14 months, the company went belly up. Its bankruptcy trustee filed a fraudulent conveyance lawsuit against the investors, their lenders and advisers, maintaining that the debt-based LBO left the company too weak to survive. The suit sought repayment of the purchase amount, transaction fees and interest, amounting to nearly $20 million, according to Robert J. Cindrich, who represented the bankruptcy trustee.

Cindrich, of Cindrich & Titus in Pittsburgh, said he will ask the full court to review the ruling, which was made by a panel of three judges. He called the decision “fairly adverse” to victims of failed LBOs.

Advertisement