Pay ‘N Pak Stores, Inc. v. Court Square Capital Ltd.

Citicorp (defendant) bought Pay ’N Pack Stores, Inc. (Pay ’N Pack) in a leveraged buyout. To accomplish the purchase, Citicorp took out loans and then repaid the loans with Pay ’N Pack’s capital after the acquisition. Pay ’N Pack’s trade creditors were paid for three years after the acquisition, but less than five years after the buyout, Pay ’N Pack went bankrupt. A group of Pay ’N Pack’s unsecured creditors (the unsecured creditors) (plaintiffs) sued Citicorp, alleging that the payments to the acquiring stockholders as part of the transaction were fraudulent conveyances. The district court instructed the jury that the key to the case was whether Pay ’N Pack received something of fairly equivalent value in the transaction. Citicorp argued that in the leveraged buyout Pay ’N Pack received the nontangible benefit of avoiding being taking over by a third-party “raider” who planned to loot the company and immediately leave it for dead. Citicorp also presented evidence that Pay ’N Pack went bankrupt not because of its lack of remaining assets after the buyout but due to a recession in the industry. The jury returned a verdict in favor of Citicorp. The unsecured creditors appealed, arguing that the case should not have been presented to the jury, but rather that the district court should have held as a matter of law that Pay ’N Pack did not receive something of fairly equivalent value in the transaction.