Credit Managers Association of Southern California v. Federal Company

629 F. Supp. 175 (1985)

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Credit Managers Association of Southern California v. Federal Company

United States District Court for the Central District of California
629 F. Supp. 175 (1985)

Facts

Crescent Food Company (Crescent) distributed food in California. The Federal Company (defendant) owned Crescent until May 1982, when Federal sold Crescent to the Teeple-Reizer Acquisition Company (TRAC), an entity comprised of Crescent’s top management, in a leveraged buyout (LBO). Two senior Crescent executives contributed $85,000 to TRAC. TRAC paid for Crescent with cash and a promissory note from TRAC and Crescent. Crescent also paid off a $7.25 million loan from Federal, which Crescent funded with a loan from the General Electric Credit Corporation (GECC). GECC made the loan based on its valuation of Crescent’s expected cash flows and assets. In November, GECC loaned Crescent an additional $2.5 million. After the LBO, Crescent suffered several setbacks: (1) suppliers extended less credit, requiring Crescent to pay its bills sooner; (2) Crescent had to match competitors who gave customers more time to pay; (3) Crescent workers went on strike; and (4) some Crescent customers went out of business. In October 1983, Crescent assigned its assets for the benefit of its creditors, which was a California alternative to bankruptcy, to the Credit Managers Association of Southern California (CM) (plaintiff). CM sued Federal, alleging, among other things, that (1) the LBO was a fraudulent conveyance because it left Crescent with unreasonably small capital and (2) Crescent’s note payments to Federal were unlawful shareholder distributions. Federal responded that the LBO did not undercapitalize Crescent, primarily citing GECC’s favorable projections, GECC’s November loan, and the fact that TRAC’s principals invested their own money. Federal attributed Crescent’s inability to meet GECC’s projections on the strike and other post-LBO setbacks. CM countered with an expert witness who attacked GECC’s sales forecast and questioned Crescent’s ability to obtain additional post-LBO loans if necessary. Federal also argued that CM did not have standing to pursue an unlawful-distribution claim because it was not a Crescent creditor.

Rule of Law

Issue

Holding and Reasoning (Rafeedie, J.)

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