# Gernsbacher v. Campbell (In re Equipment Equity Holdings, Inc.)

> United States Bankruptcy Court, N.D. Texas · April 12, 2013 · 491 B.R. 792

URL: https://www.frixlaw.com/law-library/cases/8495887

## Case

- **Full name:** In re EQUIPMENT EQUITY HOLDINGS, INC., Debtor. Harold Gernsbacher, Andrew Scruggs, James Scruggs, Lee Scruggs, William Scruggs, Robert Zintgraff, David Campbell, Reed Jackson, Cynthia Jackson, Lynda Campbell, Jeff Grandy, Jeffrey Vreeland, Walter Eskuri, Roger Yang, Reuben Palm, James Palm, Richard Palm, Mark Palm, Michael Palm, Thomas Palm, Shannon Palm, Susan Palm, Maureen Palm, Pamela Palm, Kristen Palm, Gene Lee, Stephen Howze and Stephen Reynolds v. David Campbell, S. Reed Jackson, Robert N. Zintgraff, Andrew Scruggs, Walter Eskuri, Harold Gernsbacher, Glencoe Growth Closely-Held Business Fund, L.P., Stockwell Fund, L.P., Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners II LLC, Glencoe Capital Partners II L.P., Thomas M. Garvin, Glencoe Capital Partners II, Thomas L. Bindley Revocable Trust, Kevin Bruce, Ed Poore, and Bill Aisenberg
- **Court:** United States Bankruptcy Court, N.D. Texas
- **Decided:** April 12, 2013
- **Citations:** 491 B.R. 792; 2013 Bankr. LEXIS 1526; 2013 WL 1550133
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Jernigan
- **Judges:** Jernigan
- **Cited by:** 4 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/8495887

## How later opinions describe it (automated extraction)

- rejecting effort to subordinate claims under promissory notes under § 510(b), citing Collier, Montgomery Ward

## Opinion text

AMENDED 1 MEMORANDUM OPINION IN SUPPORT OF JUDGMENT: (1) DENYING PLAINTIFFS’ CLAIMS FOR (A) SUBORDINATION UNDER SECTION 510 AND (B) RE-CHARACTERIZATION; BUT (2) TREATING CERTAIN PLAIN-TIFFSISELLER NOTEHOLDERS AS PARI PASSU WITH THE DEFENDANTS/NEW NOTEHOLDERS
STACEY G. JERNIGAN, Bankruptcy Judge.
“Equity is a roguish thing. For law we have a measure, know what to trust to; Equity is according to the conscience of him that is Chancellor, and as that is larger or narrower, so is Equity.”
-John Selden 2
*798 The above-referenced adversary proceeding (“Adversary Proceeding”) involves the doctrines of equitable subordination (as set forth in section 510 of the Bankruptcy Code) and recharacterization (a doctrine created in case law). Specifically, the Adversary Proceeding involves a dispute within a chapter 7 bankruptcy case between two different, sophisticated creditor groups wherein one creditor group (the plaintiffs) seeks to have the claims of the other creditor group (the defendants) either equitably subordinated to the plaintiffs’ claims or recharacterized as equity. A chapter 7 trustee holds a pot of money (millions of dollars) that he cannot disburse until this Adversary Proceeding is resolved. As will be explained in detail below, the claims of the plaintiff-group, against the debtor-entity, originated first in time — having originated in connection with a so-called “roll up” of the plaintiffs’ former, separate companies into the debt- or-entity (ie., the debtor-entity was created in order to buy the plaintiffs’ former companies, creating one big company, and the plaintiffs were each paid cash, notes payable, and stock for the purchase of their companies). The claims of the defendant-group that are sought to be subordinated or recharacterized were created much later, when the defendants made loans to the debtor-entity at a time when the debtor-entity was in serious financial distress (ie., unfortunately, the “roll up” did not create the synergies or profitable company that had been anticipated); moreover, the defendant-group loans were documented in such a way to entitle them to payment ahead of the plaintiff-group.
The court held a trial in the Adversary Proceeding over nine days in 2012. The court has decided to deny the requests for subordination and recharacterization. However, the court has decided that a subset of the Plaintiffs (who never executed certain documents — as later described herein) should be treated pari passu with the Defendants. The following are the court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. Any finding of fact more appropriately regarded as a conclusion of law should be treated as such, and vice versa.
I. INTRODUCTION
This litigation began with the filing of an involuntary bankruptcy petition. On December 1, 2009, six creditors 3 filed an involuntary chapter 7 bankruptcy petition against Equipment Equity Holdings, Inc., formerly named Strategic Equipment and Supply Corporation (referred to interchangeably herein as the “Debtor” or “SESC” or the “debtor-entity”). After initial opposition, the Debtor consented to an Order for Relief on May 25, 2010. As of the Petition Date, the Debtor was no longer an operating company, as it had sold substantially all of its assets more than four years earlier. Thus, upon the commencement of the bankruptcy case, the Debtor held, as its only remaining assets: (a) approximately $3.6 million in cash; (b) certain alleged potential causes of action for fraudulent transfers and alleged breaches of fiduciary duty; and (c) a small minority equity interest in the Debtor’s successor-in-interest, also known as Strategic Equipment and Supply Corporation (“New SESC”). New SESC is an operating restaurant and supply company, based in Dallas, and is majority owned by an affiliate of Brazos Private Equity Partners (“Brazos”).
This Adversary Proceeding was filed on June 10, 2011, almost a year after the Order for Relief was entered. The Adver *799 sary Proceeding, at its core, as alluded to above, is a dispute over the priority of payment among two groups of creditors: (a) the individual holders of certain “Seller Notes” (the “Plaintiffs”); 4 and (b) the individual holders of certain “New Notes” (the “Defendants”). 5
The “Seller Notes” (herein so called) are those certain 9% Junior Subordinated Promissory Notes, issued by SESC. SESC issued Seller Notes in the aggregate principal amounts of $8,213,999.99 on or about January 14, 2000, then another $1,957,018.84 on or about September 12, 2000, and then another $5,111,816.73 on or about March 14, 2002, for a total of $15,282,825.70. The total outstanding balance of the Seller Notes as of May 25, 2010 (the date of the Order for Relief) was $28,097,714.31. The Plaintiffs collectively hold 100% of the Seller Notes. 6
The “New Notes” (herein so called) are those certain 15% Junior Subordinated Promissory Notes issued by SESC on or about March 8, 2002, in the aggregate principal amount of $6 million (the “New Notes”). The total outstanding balance of the New Notes as of May 25, 2010 (the date of the Order for Relief) was $31,759,850.84. The Defendants collectively hold 100% of the New Notes, but one aspect of this is noteworthy. Six of the Plaintiffs that are, obviously, Seller Note holders (i.e., Harold Gernsbacher, Jr., Robert N. Zintgraff, David Campbell, Reed Jackson, Andrew Scruggs and Walter Eskuri) also hold New Notes representing 7.35% of the outstanding balance of the New Notes. These individuals are named as nominal Defendants in their capacities as holders of both types of notes at issue in the Adversary Proceeding. However, these individuals have already agreed to the relief sought by the Plaintiffs in this Adversary Proceeding and are not adverse to the Plaintiffs. In other words, regardless of the outcome of this Adversary Proceeding, these individuals request that their New Notes be afforded the same treatment as Defendants’ New Notes. For the avoidance of doubt, the Defendants who are not also Plaintiffs hold 92.65% of the outstanding balance of the New Notes.
With regard to this dispute over priority of payment, the holders of the Seller Notes have asserted three specific causes of action against the holders of the New Notes. 7 *800 First, the holders of the Seller Notes have sought to recharacterize the New Notes as equity pursuant to the Fifth Circuit’s holding in Grossman v. Lothian Oil, Inc. (In the Matter of Lothian Oil, Inc.), 650 F.3d 539 (5th Cir.2011). As to the second and third causes of action, the holders of the Seller Notes further contend that the New Notes should be subordinated to the Seller Notes pursuant to sections 510(b) and (c) of the Bankruptcy Code. Additionally, the holders of the Seller Notes have requested a declaration that the underlying documentation evidencing the New Notes, which effectively subordinated the Seller Notes to the New Notes, is unenforceable against the holders of the Seller Notes. 8
For the reasons articulated below, the court holds that the New Notes are properly characterized as debt and, thus, should not be “recharacterized” (under case law such as Lothian Oil) and are not subject to subordination under either section 510(b) or (c) of the Bankruptcy Code. As to the Plaintiffs declaratory judgment request, the court holds that certain of the Plaintiffs are, in fact, entitled to pari pas-su treatment with the New Notes, due to the fact that certain of these Plaintiffs did not execute an acceptable form of written consent to effectuate the subordination of the Seller Notes to New Notes. However, to the extent a Plaintiff gave adequate consent to the subordination of the Seller Notes to the New Notes and signed documentation evidencing such consent (in this case, through the execution of the Amended and Restated Securities Purchase Agreement), the court believes that such Plaintiff consented to the subordination of its Seller Notes to the New Notes and, thus, his/her Seller Notes will be treated as such.
II. JURISDICTION
Bankruptcy subject matter jurisdiction exists in this Adversary Proceeding, pursuant to 28 U.S.C. § 1334 (b). This bankruptcy court has authority to exercise such subject matter jurisdiction, pursuant to 28 U.S.C. § 157 (a) and the Standing Order of Reference of Bankruptcy Cases and Proceedings (Misc. Rule No. 33), for the Northern District of Texas, dated August 3, 1984. “Core” matters are involved in this matter, pursuant to 28 U.S.C. § 157 (b)(2)(A), (B), and (O). The bankruptcy court believes that it has Constitutional authority to issue a final judgment in this matter.
Venue is proper in this district, pursuant to 28 U.S.C. § 1409 (a), as the Debtor’s chapter 7 case is pending in this district.
Finally, the statutes that substantively govern this dispute are primarily: 11 U.S.C. §§ 502 , 510(b), 510(c), and 105(a). Federal Rules of Bankruptcy Procedure 7001(2) and 7001(8) also apply.
*801 III. FINDINGS OF FACT 9
A. The SESC Roll-up and Seller Notes
1. The Debtor, formerly known as Strategic Equipment and Supply Corporation, was engaged in the marketing, distribution and installation of commercial food service equipment and supplies.
2. The Plaintiffs are the former owners of seven regional restaurant equipment and supply companies who sold their companies to SESC in 2000.
3. In 1999, several of the Plaintiffs entered into discussions with the private equity firm known as Glencoe Capital, LLC (“Glencoe Capital” or “Glencoe”), pursuant to which the Plaintiffs contemplated selling their companies as a group and wanted to seek potential acquirers. In connection with this effort, certain of the Plaintiffs retained William Spalding, of the law firm of King & Spalding, as counsel, and Amy Forrestal, an investment banker, who at that time was employed with Bank of America.
4. Glencoe Capital is a private equity firm, based in Chicago, Illinois. Defendant Glencoe Capital Partners II, LP, (“Glencoe Partners”), is a limited partnership that acts as an investment fund for its limited partners. 10 Glencoe Partners was part of a group of investors consisting of itself, Ron Bane, Thomas Garvin, Glencoe Closely-Held Business Fund, L.P., the State of Michigan, as custodian for three (3) Michigan public employee retirements funds, Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners II, LLC, and MassMutual Corporate Investors (collectively, the “Glencoe Investors”). 11
5. After a series of meetings in 1999, the Plaintiffs and Glencoe Capital mutually decided to pursue a roll-up transaction. SESC was incorporated to act as the vehicle to acquire the various regional companies that would participate in the roll-up transaction.
6. On January 14, 2000, SESC acquired the operations of six previously separate companies through a combination of stock and asset purchases (the “Roll-up *802 Transaction”). In connection with the Roll-up Transaction, the Plaintiffs, with the exception of three Plaintiffs (Gene Lee, Stephen Howze and Stephen Reynolds), received in exchange for their respective ownership interests in, and the assets of, their companies aggregate consideration of $67.6 million, which was comprised of approximately $51.2 million in cash, $8,213,999.99 in 9% Junior Subordinated Promissory Notes (the “Seller Notes”), and SESC common stock (350,000 shares) valued at $8,213,999.99 for purposes of the transaction. 12 The six companies acquired were Gernsbacher’s, Inc., located in Fort Worth, Texas; Medley Restaurant Equipment and Supply Co., Inc., located in Albany, Georgia; Palm Brothers, Inc. located in Minneapolis, Minnesota; St. Cloud Restaurant Supply, located in St. Cloud, Minnesota; Scruggs, Inc., located in Knoxville, Tennessee; and Top of the Table, Inc., located in San Antonio, Texas. All of the acquisitions were accounted for under the purchase method of accounting, which resulted in initial allocated excess of cost over the aggregate fair value of net assets acquired (“goodwill”) of approximately $55 million.
7.On September 11, 2000, SESC subsequently acquired the assets of a company owned by the remaining three Plaintiffs: W.H. Reynolds Distributor, Inc. (“W.H. Reynolds”), a Florida corporation. Plaintiffs Gene Lee, Stephen Howze and Stephen Reynolds owned W.H. Reynolds. They received consideration of $11.6 million, comprised of approximately $8.4 million in cash, $1.2 million in Seller Notes dated September 12, 2001, and SESC common stock (27,394 shares) valued at $1.2 million for purposes of the transaction. 13 In connection with the W.H. Reynolds acquisition, the other Plaintiffs were issued additional Seller Notes dated September 12, 2000 in an amount totaling $757,018.84.
8. The total principal amount of all the Seller Notes is $15,282,825.70. 14 According to their terms, the Seller Notes earned 9% annual interest, which the Debtor was required to pay on a semi-annual basis on April 15 and October 15. 15 The Plaintiffs received one interest payment on account of the Seller Notes, and they have not received any further payments. 16
9. As part of the Roll-up Transaction, the Glencoe Investors paid SESC $15.3 million at closing of the Roll-up Transaction in exchange for 65% of the Debtor’s common stock. 17 The Glencoe Investors also executed a Co-Investor Stockholders Agreement, dated January 14, 2000, (the “Co-Investor Agreement”), in which the Glencoe Investors agreed to vote their shares of stock in the Debtor in the same manner as Glencoe Partners. Prior to March 8, 2002, the Co-Investor Agree *803 ment gave Glencoe Partners voting control of approximately 65% of Debtor’s stock.
10. After the Roll-up Transaction, SESC’s shareholders contributed additional cash to SESC in August 2000, with the Glencoe Investors contributing $1.8 million and Plaintiffs contributing $1.2 million. In September 2000, the Glencoe Investors contributed another $8 million to partially fund SESC’s acquisition of W.H. Reynolds. Thus, as of the closing of the W.H. Reynolds acquisition, the Glencoe Investors had invested $20.1 million in SESC.
B. SESC’s Additional Financing/Capital Structure
11. The cash raised by SESC in connection with the Roll-up Transaction (the vast majority of which went to the Plaintiffs) was structured through a combination of debt and new equity, as shown below:
January H, 2000 Cash Inflows to SESC:
$29.2 million Senior Credit Facility (La-Salle Bank, Lead Syndication Agent) 18 $10.0 million Senior Subordinated Debt (purchased by Mass Mutual)
$15.3 million Purchase of 650,000 shares (65%) by Glencoe Investors $54.5 million Total Cash Provided by Initial Financing
In total, SESC’s initial financing and capital contributions generated $54.5 million in cash, of which $8.3 million was used to fund SESC’s working capital and to pay transaction fees. Each component of SESC’s debt is summarized in detail below.
12. First, on January 14, 2000, the Company entered into a $41 million senior credit facility through a credit agreement between LaSalle and SESC, dated January 14, 2000 (the “Credit Agreement”). The credit facility initially consisted of two $10,500,000 term notes and a $19,000,000 revolving credit line. The Term A Note was payable in quarterly principal and interest installments, with a final maturity at December 31, 2004. The Term B Note was payable in quarterly principal and interest installments, with a final maturity at December 31, 2005. In connection with the later acquisition of W.H. Reynolds on September 11, 2000, the two term notes were increased $3 million each and the revolving credit line was increased to $23 million. The amount of quarterly principal and interest installments was increased with this refinancing, although the final maturities remained unchanged. This revolving credit facility matured on December 31, 2004. All such borrowings bore interest at the London Interbank Offered Rate (LIBOR), plus an applicable margin as set forth in the Credit Agreement. The senior facilities were collateralized by substantially all of SESC’s assets. On a quarterly basis, the Credit Agreement required SESC to meet certain financial covenants, which included minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), minimum fixed charge coverage and senior and total debt to EBITDA ratios, among others.
13.SESC also issued $10,000,000 of senior subordinated notes (“12% Mass Mutual Notes”) on January 14, 2000 to Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners II, LLC, and MassMutual Corporate Investors (the “Mass Mutual Entities” or “Mass Mutual”). These 12% MassMutual Notes bore interest at a 12% nominal rate, payable semi-annually. No principal payments *804 were required under the 12% Mass Mutual Notes until final maturity at January 15, 2008. The 12% Mass Mutual Notes were issued pursuant to a January 14, 2000 Securities Purchase Agreement (“SPA”) between SESC and the Mass Mutual Entities. The 12% Mass Mutual Notes were subordinated to the senior credit facility, pursuant to a Subordination Agreement, dated January 14, 2000. On a quarterly basis, the SPA required SESC to meet certain financial covenants, which include minimum earnings before interest, taxes, depreciation and amortization (“EBIT-DA”), minimum fixed charge coverage and senior and total debt to EBITDA ratios, among others.
C. The Seller Subordination Agreements
14. As part of the Roll-up Transaction, the Plaintiffs executed a January 14, 2000 Subordination Agreement with the Mass Mutual Entities (the “Seller Subordination Agreement”), which provided for the subordination of the Seller Notes to the Mass Mutual 12% Notes. 19 The Plaintiffs who owned W.H. Reynolds executed a substantially similar agreement in September 2000. 20
15. Among other things, Section 3 of the Seller Subordination Agreement (as well as the subordination agreement executed by the Plaintiffs who owned W.H. Reynolds) provides:
Continued Effectiveness of this Agreement. The terms of the Agreement, the subordination effected hereby, and the rights and the obligations of Subordinated Lenders and the Purchasers arising hereunder, shall not be affected, modified or impaired in any manner or to any extent by: (a) any amendment or modification of or supplement to the Securities Purchases Agreements, any other Operative Document or any Subordinated Loan Instrument; (b) the validity or enforceability of any of such documents; or (c) any exercise or non-exercise of any right, power or remedy under or in respect of the Senior Indebtedness or the Subordinated Indebtedness or any of the instruments or documents referred to in clause (a) above. 21
16.Recital B to the Seller Subordination Agreement signed by the Seller Note-holders in the initial Roll-up Transaction defines “Securities Purchase Agreements” as “those certain Securities Purchase Agreements dated January 14, 2000 (as the same have been and hereafter may be amended, modified or restated, the ‘Securities Purchases Agreements’).” 22 However, the language is somewhat different in the Seller Subordination Agreement executed by the W.H. Reynolds parties in September of 2000. Specifically, Recital B of that Seller Subordination Agreement provided that
The Companies and the Purchasers and have entered into those certain Securities Purchase Agreements dated as of January 14, 2000 (as amended by that First Amendment dated as of August 17, 2000 the “Securities Purchase Agreements”) pursuant to which the Purchasers purchased certain notes (collectively, the “Notes”) from the Companies and certain warrants (collectively, the “Warrants”) from the Holding Company, subject to the terms and conditions of the Securities Purchase Agreements. The Companies and the Purchasers now desire to enter into a Second Amendment
*805 to the Securities Purchase Agreements dated as of September 12, 2000 (the “Second Amendment”). 23
17. The Seller Subordination Agreement also attached a form of the Seller Notes. Each Seller Note contained a provision, entitled “Subordination,” which stated that:
By accepting this Note, the Holder, for itself and its successors and assigns, agrees that this Note is subordinate in the manner and to the extent provided in ... that certain Subordination Agreement dated as of the date hereof ... in connection with those certain Securities Purchase Agreements each dated as of the date hereof (the ‘Securities Purchase Agreements’) ... as such Securities Purchase Agreements may hereafter be amended, modified, supplemented, restated, refinanced or replaced from time to time ... 24
Thus, the court finds that there was conflicting language among the governing documents about whether or not the rights of the Seller Noteholders could be affected upon an amendment or modification of the SPA.
D. The Operation and Management of SESC
18. As part of the Roll-up Transaction, Glencoe Capital and SESC entered into a Management and Consulting Services Agreement, dated January 14, 2000 (the “Management Agreement”) pursuant to which Glencoe Capital received a fee of $1,352,000 at the January 14, 2000 closing. Pursuant to the Management Agreement, Glencoe Capital agreed to provide business advice and expertise to SESC in exchange for a consulting fee of $400,000 per year, plus an additional amount based upon SESC’s sales. SESC’s credit agreement with the senior lenders capped this fee at $500,000 per year, not to exceed $125,000 per quarter. As set forth in SESC’s financial statements prepared by Pricewater-houseCoopers LLP, SESC paid Glencoe Capital management fees in the amount of $415,625 in 2000 and $500,000 in the years 2001 through 2004.
19.Additionally, SESC entered into Employment Agreements with several of the Plaintiffs, calling for an annual salary of $150,000 per year plus bonuses, paid vacations, and other benefits. Moreover, these Plaintiffs continued to manage their respective regional businesses as divisions of SESC, and SESC’s upper-management would collect the financial data received from each division and consolidate that information for transmission to Glencoe Capital in a monthly financial package. 25 Specifically, Jay Goldstein, who became the chief financial officer (the “CFO”) of SESC in June 2001, credibly testified that:
A: the Strategic Equipment & Supply Company, as you mentioned, was the Roll-up of, I believe, seven separate companies. And initially, each company had their own IT systems, accounting systems. Eventually, we rolled them all up on a common platform. At the time that I left the company, only one of the legacy companies was not on the platform. That was Reynolds. The rest of the companies were on the common platform.
Q: All right. So when you put together that — so you created a single — a single integrated accounting report for the company?
A: Yes.
*806 Q: Okay. And what did you do with that report?
A: I would — well, I would forward it to Glencoe. It would obviously be also forwarded to various senior management members of the company.
Q: Such as Kevin Bruce?
A: Yeah, of course, yes.
Q: Sure. Sure. Why did you forward a copy of that accounting to Glencoe?
A: Well, they are the majority shareholder. 26
Mr. Goldstein further credibly testified that as CFO, he would take direction from the chief executive officer (the “CEO”) of SESC, Kevin Bruce, 27 as well as from Ron Wray (an officer of both Glencoe and SESC), Beth Satterfield (chief operating officer (the “COO”) and CFO of Glencoe), and Louis Manetti (an employee of Glen-coe) pursuant to the terms of the Management Agreement. 28
20.Pursuant to a Stockholders Agreement, dated January 14, 2000, Glencoe Partners had the right to designate six individuals to serve on SESC’s nine member Board of Directors. Pursuant to the same Stockholders Agreement, the Plaintiffs received the right to designate the remaining three members of SESC’s Board. Plaintiffs Harold Gernsbacher, Robert Zintgraff and Reed Jackson sat on SESC’s Board in 2001 and 2002, when the Board considered and voted upon the issuance of the New Notes transaction described in detail below. 29 Glencoe Partners appointed the remaining six members of the Board. Terry Malone, who was employed by Glencoe Partners, served as chairman of the Board.
E. The Debtor Defaults on Its Financial Covenants With Senior Lender LaSalle, Shortly After the Roll-up Transaction
21. SESC was highly leveraged from its inception. On January 14, 2000, its first day of business, SESC had total assets of $93,139,387 and total liabilities of $68,411,122, of which goodwill and other intangibles comprised $56,715,897. Subtracting the stated value of goodwill, on its first day of business, SESC had a negative tangible net worth of $33,690,632. In fact, it was only a few months after beginning operations that SESC started to run short on cash.
22. As stated previously, on August 17, 2000, the Seller Noteholders and the Glen-coe Investors contributed $3 million in new equity capital to SESC. This was to maintain compliance with its lending covenants with SESC’s senior lender, LaSalle. 30 In fact, at the time this money was contributed to SESC, Reed Jackson, one of the Seller Noteholders who contributed a portion of this $3 million, testified that he remembered being told this was due to the fact that Glencoe had paid too much to the Seller Noteholders in the original Roll-up Transaction and that, as a result, the company had already run out of working capital. 31 Despite this additional cash infusion, *807 however, SESC’s short reprieve from working capital shortfalls was short lived.
23. By May 22, 2001, SESC projected that it would breach certain of its lending covenants with LaSalle 32 and would require even more capital. 33 SESC’s projected FY2001 EBITDA was $11.5 million. SESC’s May 22, 2001 Board Meeting presentation indicated that SESC’s first quarter 2001 EBITDA was below budget by more than 40%, as EBITDA of $1.289 million was 58.5% of the $2.204 million budget. Why was SESC facing financial ruin so early after its inception?
24. At the Trial, the court heard evidence that the Debtor’s EBITDA was impacted by a multitude of issues including: (1) that SESC was unable to capitalize on any synergies that it potentially gained as a result of the Roll-up Transaction; 34 (2) that the September 11, 2001 tragedy had negatively impacted the hospitality industry as a whole in terms of gross earnings; 35 (3) that SESC tended to focus its business on pursuing high revenue but low-margin sales; 36 and (4) that one of the rolled-up companies (the entity owned by the Palms) had a disastrous 2001 performance. 37 As to the factors, noted above, Jay Goldstein, SESC’s CFO, credibly testified: Q: Did the company perform as well as its projections?
A: No.
Q: Why not?
A: I’ll need a second to think about the answer—
Q: Sure.
A: — on that one. Why not? You have a lot of factors that impact the performance. You had economic factors. Just overall economy of the country. We had several key management — senior management members leave the company that had a lot of value — brought in a lot of value for the company. We had some big customers that did not develop as many units as we originally thought they would. So you had multiple factors impacting the performance.
Q: Did capital issues play a role as well?
A: The capital issues played a role in terms of the bonding that we can get to do large construction jobs. Also, to a lesser degree, sometimes we had to manage our payables. We couldn’t pay everybody on time so we might have lost some discounts here and there.
Q: Okay. I want to talk a little bit about those discounts. Would you tell the Court exactly what you mean by that because this is actually — it’s actually an important issue.
A: Okay. Well—
Q: You know your business—
A: Right.
Q: — but she’s learning.
A: Right. Okay. When you [buy] product from suppliers, different suppliers *808 have different terms. And sometimes the terms allow you to pay a little bit earlier to take advantage of a discount. It might be anywhere from one percent to maybe three, four or five percent off the bill.
Q: And were those discounts important to the debtor’s business?
A: I wouldn’t say they were [not] material to the company’s business but they did have an impact, yes.
Q: Okay. And would you continue telling the judge what you were saying before I rudely interrupted you?
A: Yeah. You might have to help me with where I was going. Well, one thing that I was saying was that their cash was limited at times and we couldn’t take advantage of all the discounts all the time. So we occasionally did lose discounts.
Q: Okay. And did that affect earnings?
A: Well, it impacted earnings. I don’t think it impacted earnings significantly but it did impact earnings.
Q: Okay. And what were you telling the Court about the effective capital issues on bonding?
A: Well, the — in order to bid on large jobs, you needed to put up bonds. And there were periods of time over the course of my ten years at Strategic where we were limited to the amount of the bond that the bonding companies would put up for us. So we were effectively — it excluded us from bidding on very large jobs. The other impact is because Strategic Equipment & Supply was a fairly leveraged company, the premiums that we had to pay for the bonds were a little bit high as well.
Q: Okay. And did those affect the company’s earnings?
A: Again, I would say that it impacted it significantly but it did reduce the company earnings, yes.
Q: Okay. And did the inability to bid on certain large projects affect the company’s performance?
A: Yes.
Q: And was lack of money or underca-pitalization the reason why the debtor had trouble getting performance bonds?
A; I would say the reason the company had a problem getting performance bonds was just the overall leverage position of the company.
Q: Too much debt?
A; More — the ratio of our debt to our equity was a little high. 38
25. As a result of these issues, SESC breached the financial covenants in its Senior Credit Facility as of the end of the quarter ended June 30, 2001 as follows:
• The Fixed Charge Coverage Ratio (.93), was 7% below the covenant minimum of 1.0;
• The Senior Debt to EBITDA Ratio (4.08), was 36% above the covenant maximum of 3.0;
• The Total Debt to EBITDA Ratio (6.04) was 27% above the covenant maximum of 4.75; and
• Adjusted EBITDA ($9.4 million) was 16% below the covenant minimum of $11.2 million.
26. SESC remained in breach of these same loan covenants for the fiscal quarters ending September 30, 2001 and December 31, 2001.
27. On August 21, 2001, LaSalle Bank, acting as agent for the syndicate of lending *809 banks, notified SESC that it had breached sections 10.6.1 through 10.6.4 (inclusive) of the Credit Agreement. The covenants breached were:
• 10.6.1 — Fixed Charge Coverage Ratio;
• 10.6.2 — Senior Debt to Adjusted EBITDA Ratio;
• 10.6.3 — Total Debt to EBITDA Ratio; and
• 10.6.4 — EBITDA.
However, the August 21, 2001 letter from LaSalle did not impose specific penalties, but it did include a reservation of rights. 39 As to the severity of these covenant breaches, Beth Satterfield credibly testified that:
Q: Okay. And the actions that the bank were taking in terms of how they fall on the spectrum of the activity that the bank could take, how did you view these actions now that you were at Glencoe negotiating with the bank on these issues?
A: Right. You know, this was certainly you know, much more of an extreme position that the bank was taking. Sometimes if a covenant is a small miss, you know, you might just send a quick letter, hey let’s just get a quick — one-page amendment. That’s like on one level. And then this was very serious. I think the bank was very worried about the prospects of its loan getting paid back and you know, starting back in August, starting with its reservation of rights letters. A lot of times you don’t even get those. They started there and they kept escalating their position.
Q: Was there a concern that the bank would stop funding the revolver?
A: Yes.
Q: And if the bank — were there discussions with the bank about that?
A: Yes.
Q: And the bank being LaSalle? 40
Ms. Satterfield further credibly testified that:
Q: So when the defaults occurred then in June of 2001, this was not a — this was an issue that LaSalle had been aware of in the past, the company was not meeting its plan?
A: Yes.
Q: Okay. And from the lender’s perspective versus the first trip to the well or the second trip to the well, what does that mean?
A: Well, I think that this company was losing credibility with the banks. I mean even right from the beginning, the company was having working capital problems seven months after — really less than seven months after the deal [the Roll-up Transaction] was done. And then when the Reynolds deal got done, covenants were reset to accommodate Reynolds, but also were to accommodate the fact that the company wasn’t meeting its projections. And I think the bank was fairly accommodating and— but over time, this company had the reputation of they haven’t met a projection yet. And so there was a credibility issue. 41
28. Representatives of Glencoe Capital met with La Salle Bank on September 5, 2001. At that time, SESC projected its 2001 EBITDA to be $9.5 million, which was $5.1 million, or 35%, below budget.
*810 F. Glencoe Capital Begins Efforts to Remedy the Covenant Breaches With LaSalle
29. By no later than September 13, 2001, Glencoe Capital began developing a strategy to possibly recapitalize SESC. Glencoe Capital initially considered investing the new capital in the form of an infusion of equity or preferred equity in SESC. 42
30. On September 17, 2001, Mark Agnew 43 sent an e-mail to Beth Satterfield 44 stating as follows:
Beth,
With a somewhat back of the envelope calculation.Glencoe’s returns are at 10.5% with a $3,250 million debt piece (65% of $5 million, so seller’s are forking over $1.75 million, so this is conservative) which takes a total of 80% of the equity value of the company at exit. Obviously, moving parts of this analysis include Mass Sub debt warrants, management ISO, etc. ... at some point we should sit down and discuss modeling questions (assumed the traditional debt increases Goodwill on the Company) and figure out how this entire thing is going to work.
On the term sheet side, I read both.... I am sure we will want the term sheet that designates what percent of the combined entity we want rather than a set return ...
Hope you had a nice weekend
Mark
Based upon the above-quoted e-mail, the court finds that by September 17, 2001, Glencoe Capital was considering the idea of contributing more funds to SESC.
31. On September 25, 2001, Lincoln Partners, LLC (“Lincoln Partners”), which is a corporate finance advisory firm that had previously done work for Glencoe Capital, made a presentation to Glencoe Capital regarding a possible recapitalization of SESC. 45 In its presentation to Glencoe Capital, Lincoln Partners outlined parameters and potential options for a recapitalization of SESC. 46 Two points addressed in that presentation were as follows: (1) “SESC needs additional equity to reduce leverage,” and (2) “How should a new round of equity capital be structured and priced?” 47 Lincoln Partners further indicated that a new round of equity capital could be invested as a subordinated promissory note with high accrual of PIK (payment in kind) interest, coupled with a rights offering. There was also a handwritten arrow on a chart of SESC’s capital structure below the 12% Mass Mutual Notes and ahead of the Seller Notes. 48
32. On October 5, 2001, Lincoln Partners sent Glencoe Capital a draft of an engagement letter to write a fairness opinion to SESC’s board of directors. The proposed transaction described by the draft engagement letter is as follows:
*811 In the proposed financing (the “Financing”), the Company will sell up to $10 million of newly issued senior subordinated notes (the “Senior Subordinated Notes Class B”), which will be subordinated to any senior indebtedness of the Company; have priority over the existing seller notes and common equity; have a non-cash coupon of approximately 25%; and have detachable warrants for the purchase of additional equity interest in the Company.
While the concept of new capital coming into an insolvent company and priming existing debt has been argued in this Adversary Proceeding to be somewhat unconventional, Ronald Kahn, an owner and senior member of Lincoln Partners, testified that it “happens all the time. It’s what’s called a down round.” 49 In response to whether such transaction had to be consensual, Mr. Kahn further testified that:
A: Not necessarily. If a company’s insolvent and somebody’s willing to put some money in and legally they can put it in at a layer that they won’t be under water, happens all the time.
Q: So, you’re saying that in your experience you can put equity into a company and prime existing debt without the consent of those note holders?
A: You know, whether you call it equity or debt, the fact of the matter that it goes in at a certain layer so that it is — it is not under water, ‘cuz why would anybody put money in that’s under water, to keep a company solvent happens very frequently.
Q: Does it only happen to companies that are insolvent?
A: Not necessarily. It may happen for growth capital, depending upon what valuations have declined. The company might not be insolvent, but it still could happen, sure.
Q: And are not most of those transactions done consensually; that is, the debt which is being subordinated or being made inferior to some other investment agrees to the treatment in order to keep the company alive?
A: I don’t know if that’s — if that’s necessarily correct ‘cuz sometimes people just run out of capital and a company needs more capital for growth, and so, it’s done those times.
Q: Can you give us any instance in which you ever saw that done?
A: First of all, I’m not sure I could even say it for confidentiality reasons, but I’ve seen it with venture capital deals very often. 50
33. On October 8, 2001, Beth Satter-field and Ronald Wray spoke by telephone with Robert Shettle, a representative of Mass Mutual, regarding the potential structure for a recapitalization of SESC. Ms. Satterfield and/or Mr. Wray explained that the new capital would be infused into SESC in the form of notes, which would have priority over the Seller Notes and would have a feature calculated to capture 80% of the residual value of SESC after payment of the senior indebtedness (which residual value would also be paid ahead of the Seller Notes.) The October 8, 2001 discussion between Mass Mutual and Glen-coe Capital is recounted in Mr. Shettle’s email to Beth Satterfield dated October 15, 2001. 51 In the body of Mr. Shettle’s email, he inquires as to the following:
... One question regarding the structure as you and Ron [Wray] explained it last Monday:
*812 As we understand it, the new capital goes in some form of debt so that it is ahead of the Seller paper. It will have a PIK feature (15% was the amount mentioned last week). Aside from the PIK accumulating, I think the security has a feature so that it will be worth 80% of the residual value of the company after the senior and the sr. subordinated debt is paid off (the Mass Mutual notes). I understood it to be that the 80% residual value would be paid before the satisfaction of the seller notes and the existing equity. Is that the way it would work or would the 80% residual be after the seller notes are paid? Is it legal for the additional value to come before the seller notes as the seller notes are debt? 52
Based on these correspondences, the court finds that at least by October 8, 2001, Glencoe Capital had determined the basic structure of how the New Notes transaction was going to work — and it was Glen-coe Capital’s contemplation that the New Notes would have priority over the Seller Notes.
34. In terms of legal representation during the course of the New Notes transaction, Scott Williams of McDermott Will & Emery (“MWE”), served as legal counsel to both SESC as well as Glencoe. 53 While on its face, this appears to be somewhat of a conflict of interest, Kevin Bruce, SESC’s former CEO, pointedly testified:
Q: So the same law firm was simultaneously representing the issuer of the new notes [SESC] and the investor group that would be the largest purchaser of the new notes, correct?
A: Yes.
Q: Did you see a conflict of interest there?
A: Not directly.
Q: Why not?
A: Glencoe had given their position as — on the board also had a very strong fiduciary responsibility to all the shareholders and stakeholders. So as such, there was — I didn’t see a direct conflict with the fact that the expertise from McDermott Will & Emery would be deployed against the needs of the company at that time.
Q: Okay. So McDermott Will & Emery had a fiduciary responsibility to everybody?
A: I’m not sure if they had a fiduciary responsibility to everybody, though they represented the company.
Q: I misspoke. I heard what you said, and I misspoke. What I meant to say was Glencoe had a fiduciary responsibility to everybody.
A: From a board perspective, sure. Yes.
Q: Okay. Had a fiduciary responsibility to the board?
A: Um-hum, yes.
Q: A fiduciary responsibility to creditors?
A: Yes.
Q: And to the shareholders?
A: Correct.
Q: And fiduciary responsibility; that entails full disclosure, doesn’t it?
A: That is a certain one requirement. Full disclosure, relying upon, you know, reasonable opinions of experts and others, in my understanding, also requires *813 that you put the needs of the stakeholders, shareholders ahead of your own. 54
Moreover, Scott Williams, the MWE lawyer previously mentioned, testified that while Glencoe’s and SESC’s interests were not “perfectly aligned,” that with respect to “getting the restructuring done Glencoe and SESC had the same interests” and that “absent a recapitalization, there would have been a lot of bad things that happened to every part of the capital structure.” 55
35. Additionally, the court heard evidence that the Board of Directors obtained separate counsel (Gardner, Carton & Douglas) that was independent to the entity SESC’s counsel. 56 The court finds this to be important and an indication of prudence and sensitivity regarding fiduciary duties by those spearheading the recapitalization project. While the court heard little evidence regarding what services this law firm provided to the Board, the minutes of a Board meeting held on November 20, 2001 reflect that one of the lawyers of Gardner, Carton & Douglas, Stephen A. Tsoris, “provided guidance to the Directors on the applicable legal standards and distributed to each Director a memorandum setting forth those standards.” 57
36. The Board held a meeting on October 8, 2001. 58 The minutes of that meeting reflect that the Board voted to appoint a Special Finance Committee, consisting of Terrance Malone, Richard Coonrod, and Thomas Bindley, to examine and develop strategies to recapitalize SESC. Terrance Malone, Richard Coonrod, and Thomas Bindley were each members of Glencoe Capital’s executive network.
37. Meanwhile, things were getting even more tumultuous with the senior lender, LaSalle. On October 10, 2001, La-Salle sent a letter to SESC demanding that SESC stop making semi-annual interest payments to the holders of the 12% Mass Mutual Notes and to the holders of the Seller Notes. 59 Additionally, on October 17, 2001, LaSalle sent SESC a letter notifying SESC of its intent to impose a default rate of interest one percentage point higher than the regular contract rate, and reserving the right to charge a default rate of interest two percentage points higher than the regular contract rate if SESC had not entered into definitive documentation of a restructuring of the Credit Agreement by December 1, 2001. 60 Consequently, on October 17, 2001, SESC sent a letter to the holders of the Seller Notes informing them that SESC would not make the interest payment due to the Seller Noteholders on October 15, 2001, due to the defaults under the Credit Agreement. 61
38. On October 23, 2002, Mark Agnew (of Glencoe) sent an e-mail to Beth Satter-field (also of Glencoe) with the subject line Rights Offering Draft. Mr. Agnew asked Ms. Satterfield the following questions:
*814 1.) Multiple of exit (should it stay the same for each year and what should it be)
2.) How much equity are we putting in
3.) What percent of the new equity does Glencoe put in
4.) What are components of new equity (PIK, at what rate? etc.)
5.) Assuming we want to use bank case (or Jay’s case) with this analysis
6.) Right now model is spitting out a 16.8% IRR ... is there a target IRR we want to hit, is this it? Do we want to get a 20% blended IRR in each year 62
The Plaintiffs have argued that this is just one of several e-mails demonstrating that Glencoe was actually viewing its contemplated new investment as an equity contribution rather than debt. The court does not believe these e-mails merit this degree of conclusiveness. First, Glencoe Capital was still exploring options and structure. Moreover, Glencoe Capital was a private equity firm, and as such, any money that they invested was equity to them. It was not equity from the perspective of SESC, but rather from the perspective of the Glencoe Investors. As credibly stated by Beth Satterfield:
A: But you have to remember that Glencoe put — only puts in equity from our limited partners and then we put that in in various forms. It could be debt. It could be subordinated debt. It could be preferred security. But we always put equity in.
Q: By definition, you always put equity in?
A: Well, by definition, we are a private equity firm.
Q: Right.
A: So we call capital from our limited partners. We discussed this at the beginning, with our Fund II investors, right.
Q: Uh-huh.
A: We call their money and then we return it to them, ultimately. That’s what private equity does. But when we’re holding their money—
Q: Uh-huh.
A: — we put it into portfolio companies in various ways.
Q: Right.
A: So for us, we would never say how much debt are we putting in? It’s always how much equity are we putting in because our funds send us equity.
Q: Okay. So when he says equity, it could be equity or debt? Would it— would it be—
A: You’re — you’re confusing two concepts.
Q: Would it be more accurate to read equity as simply the word money?
A: Right. 63
39. Shortly after these correspondences, representatives of Glencoe Capital and LaSalle began exchanging term sheets contemplating the restructuring of the La-Salle Credit Agreement. Glencoe Capital asserts that it was properly exercising the authority granted to it under the Management Agreement to negotiate with LaSalle regarding this restructuring. Specifically, the introductory paragraph of the Management Agreement provided that:
Whereas, Strategic Equipment and Supply Corp. ... desires to avail itself of the business experience and operating expertise of Glencoe Capital, L.L.C. (“Glencoe Capital”) in strategic planning, negotiating and procuring con *815 tracts, tax planning, investor relations, cost controls, compensation structure, government relations and other areas of corporate management. 64
Section 2 of the Management Agreement entitled “Services” further provided that:
(a) Glencoe Capital shall advise the Company concerning such corporate matters as relate to strategic planning, procurement of contracts, tax planning, investor relations, costs controls, compensation structure, government relations and other management matters related to the Company’s business and affairs, and as to such other matters as the parties determine to be appropriate. 65
(b) Glencoe Capital shall perform all such services as an independent contractor to the Company and neither Glencoe Capital nor its affiliates nor any of their respective directors, officers, consultants, agents or employees shall be liable for any advice offered or action taken by it or them in connection with this agreement. Glencoe Capital shall not, but virtue of this agreement, be considered an employee, agent or representative of the Company and will not have by virtue of the agreement any authority to set for or bind the Company without the Company’s prior written consent.
The court finds that Glencoe Capital was, indeed, properly exercising its powers under the Management Agreement when it began corresponding with LaSalle on how to remedy the defaults under the Credit Agreement. As further evidence of this fact, Jay Goldstein, SESC’s CFO at the time, credibly testified that Glencoe Capital managed and controlled the capital side of the business and really drove the banking relationship with LaSalle. 66 Moreover, pursuant to section 2(b) of the Management Agreement, while Glencoe Capital certainly had the implicit ability to assist in negotiations with SESC’s creditors, SESC would still ultimately need written consent by its Board and officers to ultimately act on any negotiations made between Glencoe Capital and LaSalle. 67
40. On October 25, 2001, William Syk-stus, a loan officer at LaSalle, 68 transmitted a proposed term sheet for the New Notes to Beth Satterfield of Glencoe for her review. That proposed term sheet contemplated a $7 million capital contribution in the Debtor in the form of a PIK (payment in kind) security instrument, subordinated to the LaSalle Credit Agreement and the 12% Mass Mutual Notes. Concurrently with the receipt of the proposed term sheet from LaSalle, SESC’s counsel, MWE, began working on the documents that would ultimately effectuate the New Notes transaction. 69
41. Also on October 25, 2001, the Debt- or signed an engagement letter with Lincoln Partners, retaining Lincoln Partners to prepare an opinion regarding whether the proposed New Notes were fair to the Debtor’s shareholders from a financial point of view. Specifically section 1 of the engagement letter provides that
SESC hereby engages Lincoln for the purpose of providing an opinion (the “Opinion”) as to whether the price and terms of the proposed Financing (defined herein) is fair to the shareholders of the Company from a financial point of
*816 view. In the proposed financing (the “Financing”), the Company will sell newly issued senior subordinated notes 70
The court finds that the term “senior subordinated notes” implies that these New Notes would necessarily be of a higher priority than the Seller Notes, which were referred to on their face as the “15% Junior Subordinated Note. 70
42. On November 5, 2001, Louis Man-etti 71 sent an e-mail to Beth Satterfield and Mark Agnew (both of Glencoe) listing bullet points for discussion with LaSalle regarding the New Notes. 72 The attachment to that e-mail states that the “Banks would like the seller notes to VOLUNTARILY PIK the seller notes, while Glen-coe feels that it would he difficult to get 100% to agree to such a move. Accordingly, Glencoe feels that the hanks need to pursue options under the current agreements.” 73 Based upon this e-mail, the court finds that Glencoe Capital had formed a belief that they did not think that the Seller Noteholders would voluntarily agree to accept PIK interest on the Seller Notes.
43. Several additional correspondences regarding the New Notes transaction were made on November 7, 2001. First, Mark Agnew (of Glencoe) sent an e-mail to Robert Shettle (of Mass Mutual), copying Louis Manetti and Beth Satterfield (both of Glencoe), transmitting a recapitalization model depicting a $8 million capital infusion and explaining that $5 million to $7 million likely would be required to satisfy LaSalle.
43. Also on November 7, 2001, William Sykstus (of LaSalle) sent an e-mail to Louis Manetti (of Glencoe), transmitting an attached LaSalle Term Sheet which Mr. Sykstus referred to as “LaSalle’s latest proposal.” The attachment to the e-mail contains two proposals for treatment of the Seller Notes:
Accrued and ongoing interest will be voluntarily PIK’d by the subordinated noteholders until after repayment in full of all senior bank debt; OR [i]nterest paid to the extent permitted by Senior Credit Agreement and existing Seller Subordination Agreements, with any actual dollars required to be paid out by the Company fully funded by Glencoe and its affiliates. 74
Louis Manetti then forwarded this e-mail to Ronald Wray, Beth Satterfield, and Mark Agnew.
45. On November 9, 2011, William Syk-stus sent an e-mail to Beth Satterfield, transmitting a draft of the LaSalle Term Sheet for the New Notes. Mr. Sykstus’ email to Ms. Satterfield stated that the email contained the LaSalle Term Sheet “reflecting what we discussed.” The La-Salle Term Sheet attached to the e-mail proposed the following treatment of the Seller Notes: “Accrued and ongoing interest will not be paid.” Plaintiffs assert that this change in the treatment of the Seller Notes was proposed by Glencoe Capital. Specifically, Plaintiffs rely on certain statements made by Beth Satterfield during the Trial that:
A: Right, but that’s — LaSalle just wants the money to come into the company. That’s what they care about.
*817 Q: LaSalle doesn’t care how the money comes in, correct?
A: Correct.
Q: Right.
A: Well, as long as it’s subordinate to the senior sub debt and the senior bank debt, they don’t care.
Q: Right. 75
Specifically, the Plaintiffs infer and argue from this testimony that LaSalle did not care about how the New Notes transaction was structured as long as the money came in and it was subordinate to LaSalle’s debt and the Mass Mutual debt. However, if LaSalle did not care at all about how the New Notes transaction was structured, why would it be exchanging terms sheets with SESC and Glencoe in the first place? While the court does find that LaSalle’s primary goal was to get money infused into SESC and for such money to be subordinated to LaSalle’s debt and the Mass Mutual debt, LaSalle certainly had its reasons for providing its input on how the New Notes transaction was to be structured, especially in light of the ongoing financial difficulties that SESC had been experiencing. However, even if LaSalle did not care about the structure of the New Notes transaction, the court does not find the proposed change in treatment unusual, surprising, or problematic. SESC was in a liquidity crunch. It was in severe financial distress. In any event, as pointed out by Scott Williams who was counsel for SESC, the phrases “Accrued and ongoing interest will be voluntarily PIK’d by the subordinated noteholders until after repayment in full of all senior bank debt” and “Accrued and ongoing interest will not be paid” ultimately result in the same thing (the Seller Notes not getting paid interest). This court believes LaSalle was requiring that no interest be paid on Seller Notes as long as the senior bank debt was outstanding under either scenario. 76
46. On November 9, 2001, Mark Agnew sent an e-mail to Beth Satterfield, transmitting a draft of a “Business and Financial Update” for SESC, a final version of which was ultimately included in the Subscription Booklet (described in more detail below). The draft attached to Mr. Agnew’s e-mail contains the following description of the proposed New Notes transaction under the heading “Capital Infusion”:
Glencoe is proposing to infuse a senior subordinated debt piece that is junior to the existing senior and sub debt but senior to the existing seller notes and earn-out notes. The piece will be structured to accrete PIK interest plus take a -% the enterprise value of the Company when a sale of the Company takes place. The sub debt piece will be offered pro rata to existing shareholders of the Company. The Board of Directors hired Lincoln Partners, an investment bank, to write a fairness opinion regarding the pricing of this security at market terms. After meeting with each division head and detailed analysis on comparable trading comps and comparable transaction comps, Lincoln partners determined that the terms of the capital infusion were placed at acceptable market terms.
47. Even though LaSalle was negotiating and working with SESC on remedying its defaults under the Credit Agreement, it nonetheless continued to notify SESC about its continuing defaults under the Credit Agreement. Specifically, on November 16, 2001, LaSalle notified SESC of *818 its intention to impose reserves against SESC’s borrowing base based upon its continuing defaults under the Credit Agreement. 77
G. The New Notes Transaction is Presented to the Board of SESC
48. On November 20, 2001, the Board held a meeting to discuss SESC’s financial condition and the proposed New Notes transaction. The minutes from the November 20th board meeting reflect the following:
• Mr. Malone discussed the role of the special finance committee in light of the resignation of Thomas Bindley and the association between the members of the special committee and Glencoe Capital.
• The Special Finance Committee of the Board, appointed on October 8, 2001, was dissolved.
• Beth Satterfield summarized Glencoe Capital’s negotiation with LaSalle.
• The minutes of that meeting reflect that the members of the Debtor’s Board in attendance included Terrance Malone, Kevin Bruce, David Evans, Richard Coonrod, Harold Gernsbacher, Jr., S. Reed Jackson, and Ronald Wray, and that Robert Zintgraff attended by telephone.
• Others in attendance included Ronald A. Kahn, Susan Wilson, and Alysia Tan of Lincoln Partners, Steven Tsoris and Nancy Laetham of Gardner, Carton & Douglas, special counsel to the Board, Scott Williams and Michael Boykin of McDermott Will & Emery, outside counsel to the Debtor, Jay Goldstein, CFO of SESC, and Beth Satterfield and Louis Manetti of Glen-coe Capital.
• Robert Shettle of Massachusetts Mutual Life Insurance Company and William Hoy, of McDermott Will & Emery, attended by telephone.
Also at this Board meeting, David Evans, who was both a Board member as well as a principal at Glencoe Capital, spoke about the dire financial condition of the company and that if additional monies were not put into the company, that the company would go bankrupt. 78 While some of the Plaintiffs have argued that David Evans may have exaggerated the dangers SESC was facing, Reed Jackson, who had just recently joined the Board, testified credibly that the “significance of the financial difficulties was serious and it was real.” 79 The court does not find that there was any over-dramatized displays taking place by Mr. Evans. SESC was clearly in a financial pickle.
49. After these statements by Mr. Evans, Lincoln Partners made a power point presentation to the Board which, among other things, addressed the proposed New Notes transaction. Lincoln Partners also provided the members of the Board with a draft report summarizing its analysis. Lincoln Partners reported that: (1) the new capital infusion in SESC would take the form of $6,000,000 in new senior subordinated notes (i.e., the New Notes), which would bear PIK (payment in kind) interest *819 at 15% and would come ahead of the Seller Notes in payment priority; (2) the New Notes would also have a provision requiring an additional payment to the holders of the New Notes upon a sale of the Debtor or substantially all of its assets; (3) the additional payment would be measured by 25% of the sale proceeds remaining after payment of the senior debt to LaSalle under the Credit Agreement and the 12% Mass Mutual Notes; (4) the New Notes would come with warrants for 60% of SESC’s common stock; and (5) the New Notes would be offered only to SESC’s existing shareholders and allocated pro rata in accordance with their respective share ownership.
50. On November 22, 2001, Reed Jackson, one of the Plaintiffs (ie., the Seller Noteholders) and a member of the Board at the time, sent an e-mail to certain Seller Noteholders regarding the proposed New Notes transaction. In this e-mail, Mr. Jackson refers to the New Notes as the “Mother of All Notes,” a term dubbed by Mr. Gernsbacher (another Plaintiff and Seller Noteholder). 80 This certainly suggests to the court that there was a clear understanding (at least by Plaintiffs Jackson and Gernsbacher) of some of the significantly lucrative features of the New Notes — obviously designed to compensate for risk. Mr. Jackson also created a spreadsheet based on Lincoln Partners’ modeling, depicting how the Plaintiffs’ Seller Notes and the equity would be impacted by the infusion of the proposed New Notes. He noted in his message to the Seller Noteholders that “there are many variables that will [a]ffect the outcome of each scenario (ie., EBITDA amount, multiple of EBITDA and revolver balance on date of sale, etc.). Each of these scenarios are based on assumptions in the future which obviously cannot be accurately projected.” As a follow-up, on November 26, 2001, Mr. Jackson sent an email transmitting a spreadsheet concerning the proposed New Notes transaction. The spreadsheet utilized numbers from Lincoln Partner’s “market growth” assumptions from the November 20, 2001 draft report. Finally, on November 27, 2001, Mr. Jackson sent a correspondence to Beth Satterfield attaching a spreadsheet analysis depicting different models he had made in order to help him communicate to the shareholders the reasons that the New Notes were both a necessary and powerful new security. 81
51. Concurrently, Mr. Gernsbacher, who was also the holder of a Seller Note and a member of the Board, began discussing and analyzing the New Notes transaction with other parties. Specifically, Mr. Gernsbacher testified that he and Jay Goldstein (SESC’s then-CFO) had conversations about the New Notes. 82 Moreover, Mr. Gernsbacher also talked to other Seller Noteholders about the New Notes transaction and whether those parties were interested in investing. Specifically, Mr. Gernsbacher testified that, “In general, there was a jaundiced view of what would happen. There was a general distrust of Glencoe that had begun seeping in on the company at that point, and that most people were not going to put forth any more money towards this — towards this opportunity.” 83 However, Mr. Gerns-bacher also testified that, despite these responses, he nonetheless planned on purchasing a New Note to try and protect his investment in the company as well as a belief (although he believes mistaken) that *820 he was still a member of the management team. 84
52.On November 26, 2001, the Board held a telephonic meeting to discuss the proposed New Notes transaction. The minutes of that meeting reflect that Ronald Wray summarized his understanding of the current status of the proposed transaction. The minutes of that meeting reflect that “Mr. Gernsbacher summarized his discussions with the selling shareholder group and noted that he and Mr. Jackson had met with Lincoln Partners LLC to create a model from the perspective of the selling shareholders. Mr. Gernsbacher noted that many shareholders are interested in hearing the Lincoln Partners’ presentation that the Directors heard on November 20.” 85 The minutes of that meeting further reflect that David Evans stated that “Glencoe Capital would like to modify the amount and terms of the proposed security to provide downside protection for all participating shareholders.” Finally, the minutes of that meeting further reflect that
[t]he Directors discussed the process necessary to complete the proposed transaction and agreed that William Spalding, counsel for Messrs. Gerns-bacher, Jackson and Zintgraff, should be afforded an opportunity to speak to Mr. Kahn and Ms. Wilson of Lincoln partners regarding their analysis of the proposed transaction. The Directors also agreed that the changes to the security proposed by Mr. Evans should be communicated to Lincoln Partners for their analysis. The Directors discussed the appropriate time to vote on the proposed transaction.
53.On November 30, 2001, the Board held another meeting to consider the New Notes transaction. The minutes of that meeting reflect that Louis Manetti, of Glencoe Capital, was appointed to the Board to replace Thomas Bindley, who had resigned. The minutes of that meeting also reflect that Lincoln Partners distributed a final version of the report of its analysis of the New Notes transaction, dated November 30, 2001, which reflected the changes in the proposed security requested on November 26, 2001 by David Evans on behalf of Glencoe Capital. Those changes included floor amounts for the “Additional Payment” due upon sale of the Debtor or substantially all of its assets. Following the inclusion of the changes requested by Glencoe Capital for this downside protection, the “Additional Payment” amount for 2002 and 2003 was to be calculated at 25% of the sale proceeds remaining after the payment of the senior debt to LaSalle and the 12% Mass Mutual Notes. After 2003, the “Additional Payment” amount would be the greater of 25% of the sale proceeds remaining after payment the senior debt and the 12% Mass Mutual Notes or the following:
Date of Sale Amount
1/01/04-12/31/04 $ 8,700,000
1/01/05/ — 12/31/05 $12,400,000
1/01/06-12/31/06 $15,500,000
1/01/07-thereafter $17,900,000
54.The minutes of the November 30, 2001 board meeting further reflect:
Mr. Jackson gave an update on communications between the selling shareholder board members and the selling shareholders. Mr. William Spalding of King & Spalding, an attorney who represents *821 the selling shareholders, and Ms. Amy Forestall, [sic] an investment banker formerly with Bank of America, have counseled the selling shareholders. Mr. Jackson reported that Mr. Spalding and Ms. Forestall [sic] expressed the opinion that the proposed transaction is fair to the selling shareholders. 86
55. The final written report of Lincoln Partners’ analysis given to the Board at this meeting offered certain summary conclusions, including the following:
• assuming a sale of the Company in 2007 at a multiple of 5.75x of projected 2006 EBITDA of $14,360,000, following the payment of SESC’s senior secured debt, the Mass Mutual 12% Notes and the New Notes, there would be $25,667,000 available for payment of the Seller Notes;
• “Although the new Financing is termed ‘Senior Subordinated Notes’, the structural features of this new security indicate that it has the risk profile of new equity which is being infused into SESC;”
• “The new Financing does not pay any current interest. The payment of current interest is a hallmark of subordinated debt. New subordinated debt issues of similar size typically pay current interest of 10.0%-13.0%;”
• “In addition, even after the new Financing, the amount of the debt with priority to the Financing will be $43.4 million. This represents a multiple of 4.8x SESC’s latest twelve month EBITDA. Per Portfolio Management Data, the average total debt/EBITDA ratio for new, highly leveraged loans for the third quarter of [] was 3.7x. The high level of debt ahead of the new Financing suggests that it is structurally new equity;”
• “The New Notes have a risk profile of an equity security. They are a hybrid that is redeemable, carries a PIK coupon of 15%, receives an additional payment of 25%, and receives a warrant of 60%. As a privately-negotiated, hybrid security, they lack a comparable benchmark,” and
• “The structural features of the security determine, upon an exit or sale of the company, how the proceeds from a sale are divided after repaying the outstanding senior debt and MassMutual existing subordinated debt (the ‘Gross Proceeds’). The percentage of Gross Proceeds received by the Note Holders is a proxy for their fully diluted ownership in SESC.”
Lincoln Partners concluded its report with the opinion that “[t]he valuation implied by the terms of the New Notes is within our valuation range for SESC. Therefore, the price and terms of the New Notes are fair to the shareholders of the Company from a financial point of view.”
56. Plaintiffs make much of the fact that the November 20, 2001 and November 30, 2001 written reports to the Board referenced above did not voluntarily disclose that Lincoln Partners had made a presentation to Glencoe Capital on September 25, 2001. However, no inquiry was ever made by any person or Board member seeking information on the date or substance of *822 any meetings between Glencoe Capital and Lincoln Partners. Perhaps more importantly, Plaintiffs were later offered their own opportunity to meet independently with Lincoln Partners and certain Plaintiffs did so. Ronald Kahn, who was an owner and senior member of Lincoln Partners, testified that “in most of [their] engagements of privately-private equity firms, [they] usually make the presentation first to the private equity firm.” 87 The court does not believe that this issue of an early meeting with Glencoe Capital (a then 65% shareholder) is highly relevant or points to any wrongdoing or secrecy on the part of Glencoe Capital.
57.On December 3, 2001, the Board held another meeting to discuss the New Notes transaction. The minutes of that meeting reflect that Terrance Malone confirmed that each Director had received the fairness opinion from Lincoln Partners which opined that the New Notes transaction was fair to SESC and its shareholders from a financial point of view. The minutes of that meeting further reflect that “Mr. Shettle indicated on behalf of Massachusetts Mutual that in connection with the amendment and restatement of the existing Securities Purchase Agreement, dated January 14, 2000 (as amended), to provide for the issuance of the new notes, Massachusetts Mutual would require that the maturity date of the existing 12% Senior Subordinated Notes be amended to January 5, 2008 to be consistent with the relative priority of the notes.” The minutes of that meeting further reflect that
Mr. Coonrod moved to approve the resolutions circulated earlier in the day by McDermott, Will & Emery, with the change of dates as discussed by Mr. Shettle above. Mr. Evans seconded the motion. There was no further discussion. On a roll call vote, each Director voted in favor of the resolutions, a copy of which (revised to reflect the proper dates) is attached hereto.”
H. Drafting of the New Notes Documentation
58. MWE, counsel for SESC and Glen-coe, and Choate Hall & Stewart, counsel for the Mass Mutual Entities and the holders of the 12% Mass Mutual Notes, did the majority of the drafting of the underlying documentation evidencing the New Notes. Nonetheless, there was input being provided from multiple sources with regards to the specific business terms of the New Notes. Specifically, Scott Williams of MWE testified that:
We got input from Lincoln Partners in terms of what was required from a fairness perspective. We got input from the board. We got input from management. We got input from Glencoe Capital as to what they would require in order to put the money in to save the company. So there were a lot of different places where — we got input from Mass Mutual as to what they would consent to in order to do the transaction. We got input from LaSalle as to what was required for them not to foreclose on their loan. So there was input from all sorts of sources. 88
59. On or about December 3, 2001, MWE (counsel to SESC and Glencoe) received a draft of the Amended and Restated Securities Purchase Agreement (the “ARSPA”) from Choate Hall & Stewart (counsel to Mass Mutual). The draft of the ARSPA sent to MWE on December 3, 2001 provided that the unanimous consent of all holders of the New Notes was required to change the payment terms or *823 payment amounts due on such notes. 89 The ARSPA, in its final form, would govern the terms of the New Notes.
60. On or about December 12, 2001, MWE transmitted a redlined draft of the ARSPA to Choate Hall & Stewart. MWE inserted into that redlined draft language providing that the holders of 80% in amount of the New Notes and the 12% Mass Mutual Notes would be required to change, among other things, the payment terms or payment amounts due on such notes.
61. On about January 7, 2002, Choate, Hall & Stewart transmitted to MWE a revised redlined draft of the ARSPA that struck the language providing that 80% in amount of the 12% Mass Mutual Notes would be required to change the payment terms or pay any amount due on such notes (having the effect that all of the Mass Mutual Notes would be required to change terms), but did not strike such language with respect to the New Notes.
62. The final version of the ARSPA contained a provision on page 68, Section 19, providing that the holders of at least 80% in amount of the New Notes could, among other things, consent to a modification of the payment terms or the payment amount due with respect to the New Notes without the consent of the remaining New Noteholders. As described in more detail below, this would later be referred to by the Plaintiffs as the “80% Waiver Provision.”
63. In terms of why the 80% Waiver Provision was added to the ARSPA, Scott Williams of MWE testified:
Q: Okay. And the Amended Restated Securities Purchase Agreement has different terms, correct?
A: Yes.
Q: Okay. And the terms have not changed with respect to the 12 percent Mass Mutual notes. It still requires 100 percent approval of the holders of the 12 percent notes in order to modify the payment terms, correct?
A: Yes. For Mass Mutual, it was 100 percent. There was one holder.
Q: Correct. Correct.
A: The company wouldn’t have wanted to sign an agreement that said some person who owns 0.001 percent of the note could prevent one of these things from happening. That would be a stupid thing for a company to do....
Q: The question is with respect to the 12 percent Mass Mutual notes, it still takes 100 percent, correct?
A: Correct....
Q: And with respect to the 15 percent new notes, a majority of the 80 percent of the holders had the right to—
A: A majority of 80 percent?
Q: It’s a super majority. But 80 percent of the holders in amount had the right to modify the payment terms, correct, under the Amended Restated Securities Purchase Agreement?
A: You were required to get the consent of 80 percent in order to do that, yes.
Q: Right. And if you got the consent of 8 — percent of the holders of the new notes under the Amended Restated Securities Purchase Agreement, you could modify the payment terms of the new notes?
A: Yes.
Q: Okay. Now take a look please — and that was a change from the existing Securities Purchase Agreement?
A: Well, you seem to be wanting to call it a change. I view it as a new term *824 that is reflective of the fact that you added a new tranche of notes and unlike the first tranche of notes which had a single holder where the percentage made no difference, the second tranche of notes had multiple holders so it made sense to have a less than 100 percent approval so that the company had some flexibility to get things done if it needed to ... 90
I. Approval of the New Notes Transaction & the Subscription Booklet
64. On January 14, 2002, the Board held a meeting to discuss the New Notes transaction. The minutes of that meeting reflect that Board members Messrs. Malone, Bruce, Coonrod, Jackson, Manetti, Wray and Zintgraff voted in favor of the January 11, 2002 LaSalle Term Sheet and that Scott Williams agreed to circulate resolutions by written consent for signature. The minutes of that meeting further reflect that “[t]he Board considered whether the foregoing vote should be effective if the written consent is not unanimous and concluded that it should be.”
65. On or about January 15, 2002, all of the members of the Board signed a Unanimous Written Consent of the Board of Directors of Strategic Equipment and Supply Corporation, dated January 15, 2002, authorizing “the Senior Debt Term Sheet and the consummation of the transactions contemplated thereby.” The Senior Debt Term Sheet is substantively identical to the January 11 LaSalle Term Sheet. 91
66. On January 21, 2002, SESC mailed to certain shareholders 92 a subscription booklet for New Notes offering (the “Subscription Booklet”), which served as the prospectus soliciting participation in the New Notes investment. 93 The Subscription Booklet included, among other things, the following:
• (Tab 1) Subscription Instructions for: (1) Individuals Who Choose to Participate in the Subscription; (2) Individuals Who Choose to Consent to the Transaction but Not to Participate in the Subscription; and (8) Individuals Who Choose Not to Consent to the Transaction and Not to Participate in the Subscription;
• (Tab 2) General Information about the Subscription Booklet;
• (Tab 3) Business and Financial Update, summarizing the background of the proposed New Notes transaction, recent developments, discussions with LaSalle, the structure of the capital infusion, the use of proceeds, actions by the Board of Directors; the business performance of the Debtor, and the Debtor’s business strategy;
• (Tab 4) Summary Terms for Senior Subordinated Notes (the New Notes);
• (Tab 5) Term Sheet: LaSalle;
• (Tab 6) Capitalization Table;
• (Tab 7) Pro Rata Allocation of New Notes and Warrants;
• (Tab 8) Projected Application of Gross Proceeds upon sale of Debtor;
• (Tab 9) Lincoln Partners Opinion Letter;
*825 • (Tab 10) Consolidated Financial Statements of the Company for the Fiscal Year Ended December 31, 2000;
• (Tab 11) Consolidated Financial Statements of the Company for the Eleven Month Period Ended November 30, 2001;
• (Tab 12) Form of Subscriber Questionnaire and Agreement and Written Consent of Stockholders; and
• (Tab 13) Form of Action by Written Consent of at Least a Majority in Interest of the Stockholders of Strategic Equipment and Supply Corporation.
67.The Subscription Booklet included several key forms. First, the Subscription Booklet included a Tab 13, a form titled “Action by Written Consent of at Least a Majority in Interest of the Stockholders of Strategic Equipment and Supply Corporation” (the “Shareholder Consent”), which shareholders were asked to sign if they approved of the New Notes transaction (in their capacity as shareholders) but did not wish to participate. This form provides that:
The Company intends to issue, in the aggregate, $6,000,000 in Senior Subordinated Notes (the “Notes”) and Warrants to purchase, in the aggregate 2,749,-403.0458 shares of the Company’s common (the ‘Warrants”) on the terms set forth at Tab 4 of the Subscription Booklet, dated January 2002, delivered to the undersigned (the “Subscription Booklet”) pursuant to an Amended and Restated Securities Purchase Agreement (the “Securities Purchase Agreement” and, collectively with the Notes and the Warrants and the other documents and instruments executed in connection therewith, the “Transaction”).
RESOLVED, that the undersigned hereby consents to and approves the Transaction. 94 Second, contained at Tab 12, was a form titled “Subscriber Questionnaire and Agreement and Written Consent of Stockholders” (the “Subscriber Questionnaire”), to be completed by those shareholders who elected to participate in the offering and purchase New Notes.
68. The Business and Financial Update at Tab 3 of the Subscription Booklet described the structure of the proposed New Notes and the use of proceeds therefrom and states that “[t]he terms of the New Notes are more fully described at Tab 4 of the Subscription Booklet.”
69. Moreover, Tab 4 to the Subscription Booklet stated that the New Notes would be “a new tranche of Senior Subordinated Notes issued pursuant to the Securities Purchase Agreements dated January 14, 2000 (amended and modified) related to the issuance of the Company’s $10 million 12% Mass Mutual Notes.” Tab 4 to the Subscription Booklet further stated that the New Notes “will be senior in right of payment to the payment of the Seller Notes.” 95 Tab 4 of the Subscription Booklet further provided, in part:
Additional Payments:
If the sale of SESC occurs prior to 12/31/03, the holders of the New Notes shall receive 25% of all sales proceeds, on a pro rata basis, remaining after payment in full of all senior indebtedness of the Company, the Existing Subordinated Notes (the 12% MassMutual Notes) and the New Notes (the “Additional Payment”). If the sale of SESC occurs after 12/31/03, the holders of the New Notes shall receive the greater of the Additional Payment or the following:
*826
Date of Sale Amount
1/01/04-12/31/04 $ 8,700,000
1/01/05-12/31/05 $12,400,000
1/01/06-12/31/06 $15,500,000
1/01/07-thereafter $17,900,000
Change of Control And Sale of Assets:
Upon the occurrence of a change in control or sale of all or substantially all of the assets or equity interest of the Company, the Company shall redeem all of the New Notes at a price equal to 100% of the aggregate principal, together with accrued and unpaid interest to date and the Additional Payment.
70. Additionally, the Subscription Booklet disclosed that the terms of the New Notes would be governed by the ARSPA, but stated that the ARSPA would only be sent to shareholders who elected to participate in the offering. 96 Thus, the ARSPA was not attached to or sent with the Subscription Booklet.
71. On or about January 31, 2002, the Board executed a Unanimous Written Consent of the Board of Directors of Strategic Equipment and Supply Corporation, dated January 31, 2002, authorizing shareholders to purchase less than their full pro rata allocation of New Notes.
72. On February 1, 2002, SESC delivered to the shareholders a six-page Supplement No. 1 to the Subscription Booklet, dated January 21, 2002 (the “Supplement”). The Supplement provided updated financial information for the Debtor through December 31, 2001, replaced the original Tab 8 with a new table “showing an example of the application of gross proceeds upon a sale of the Company,” and informed shareholders that they would be permitted “to purchase less than all of the stockholder’s pro rata allocation of the New Notes and Warrants.”
73. The revised Tab 8 sets forth the calculations behind the content in the Lincoln Partners report which, assuming a sale of the Company in 2007 at a multiple of 5.75x of projected 2006 EBITDA of $14,360,000, following the payment of SESC’s the senior secured debt, the 12% Mass Mutual Notes and the New Notes, stated there would be $25,667,000 available for payment of the Seller Notes. Tab 8 stated below the footnotes in font larger than the footnotes that, “The numbers set forth herein are examples only and do not represent predictions of actual performance or results. Actual results may vary materially from those indicated.”
74. This same table also included a calculation assuming a sale of SESC using projected 2004 EBITDA of $11,812,000 and a multiple of 5.75x for an enterprise value of $67,916,000, and Gross Proceeds available for distribution to the holders of the New Notes and Seller Notes in the amount of $35,208,000, following the payment of SESC’s senior debt and Mass Mutual 12% Notes, for which the total outstanding balance was projected to be $33,309,000 (this also factored in $600,000 in available cash). Under this calculation, it was estimated that there would be $17,383,000 available for distribution to the holders of the Seller Notes, meaning that the Seller Notes would not be paid in full. 97
*827 J. Documents Signed by Certain Plaintiffs Relating to the New Notes Transaction
75. The Shareholder Consent (referenced above) was signed by the following eleven (11) Plaintiffs: (1) Richard F. Palm, (2) Reuben N. Palm, (3) Cynthia M. Jackson, (4) Robert N. Zintgraff, (5) Lynda Medley Campbell, (6) James G. Palm, (7) Mark R. Palm, (8) Thomas L. Palm, (9) Jeffrey A. Grandy, (10) Eugene O. Lee, Jr., and (11) Stephen R. Howze. Other shareholders who executed the Shareholder Consent included Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners II, LLC, Ronald L. Bane. Thomas M. Garvin, and Jay Gold-stein. These shareholders owned approximately 30.5% of the outstanding Debtor shares in early 2002.
76. In signing the Shareholder Consent, these shareholders “consented] and approve[ed]” the “Transaction,” which term was defined therein as “the Corporation intends to issue, in the aggregate, $6,000,000 in Senior Subordinated Notes (the ‘Notes’) and Warrants to purchase, in the aggregate, 2,749,403.0458 shares of the Corporation’s common [stock] (the ‘Warrants’) on the terms set forth at Tab 4 to the Subscription Booklet, dated January, 2002 delivered to the undersigned (the ‘Subscription Booklet’) pursuant to an Amended Restated Securities Purchase Agreement.” Tab 4 further provided that the New Notes “will be senior in right of payment to the payment of the Seller Notes.”
77. Five (5) Plaintiffs who also elected to purchase New Notes completed and signed a “Subscriber Questionnaire and Agreement and Written Consent of Stockholders” (the “Questionnaire and Shareholder Consent”) dated as of February 2002. Pursuant to the Questionnaire and Shareholder Consent, these shareholders “eonsent[ed] and approve[ed]” the “Transaction,” which term was defined therein as “Strategic Equipment and Supply Corporation (the ‘Company’) intends to issue $6,000,000 aggregate principal amount of Senior Subordinated Notes (the ‘Notes’) and Warrants to purchase, in the aggregate, 2,749,403.0458 shares of the Company’s Common Stock (the ‘Warrants’) on the terms set forth at Tab 4 to the Subscription Booklet, dated January 2002, in which this agreement is included and delivered to the undersigned (the ‘Subscription Booklet’) pursuant to an Amended Restated Securities Purchase Agreement.” The five (5) Plaintiffs who signed the Questionnaire and Shareholder Consent were the following: (1) David Campbell, (2) Harold Gernsbacher, Jr., (3) Walter Eskuri, (4) Andrew Scruggs, and (5) S. Reed Jackson. 98 The five (5) Plaintiffs who signed the Questionnaire and Shareholder Consent hold Seller Notes which account for 34.1% of the outstanding balance of the Seller Notes. Other shareholders who executed the Questionnaire and Shareholder Consent included the Thomas L. Bindley Revocable Trust dated November 5, 1975, Glencoe Capital Partners II, L.P., Glencoe Growth Closely-Held Business Fund L.P., the State Treasurer of the State of Michigan as Custodian of the Michigan Public Schools Retirement System, State Employees’ Re *828 tirement System and Michigan State Police Retirement System. The total shareholders who executed the Questionnaire and Shareholder Consent collectively owned approximately 65.3% of the outstanding shares in the Debtor prior to the issuance of the New Notes. 99
78. After signing the Shareholder Consent and the Questionnaire, certain of the Plaintiffs also signed Signature Pages for the ARSPA. 100 SESC instructed all purchasers of New Notes, including Plaintiffs/nominal defendants Harold Gerns-bacher, Robert Zintgraff, S. Reed Jackson, David Campbell, Walter Eskuri, and Andrew Scruggs, to return two (2) executed signature pages for the ARSPA and their money for the New Notes by March 6, 2002. Harold Gernsbacher, Robert Zint-graff, S. Reed Jackson, David Campbell, Walter Eskuri, and Andrew Scruggs all subsequently signed two (2) signature pages for the ARSPA and returned their signature pages to the Debtor. Plaintiffs/nominal defendants Harold Gerns-bacher, Robert Zintgraff, S. Reed Jackson, David Campbell, Walter Eskuri, and Andrew Scruggs collectively hold Seller Notes which account for 48.56% of the outstanding balance of the Seller Notes.
79. Certain Plaintiffs’ did not sign the Shareholder Consent or the ARSPA. The following twelve (12) Plaintiffs did not sign the Shareholder Consent, the Questionnaire and Shareholder Consent, or the ARSPA: (1) Lee Scruggs, (2) William Scruggs, (3) James Scruggs, (4) Jeffrey Vreeland, (5) Roger Vang, (6) Michael Palm, (7) Shannon Palm, (8) Susan Palm, (9) Maureen Palm, (10) Pamela Palm, (11) Kristen Palm, and (12) Stephen Reynolds. These twelve (12) Plaintiffs owned approximately 4.2% of the Debtor’s outstanding shares prior to the issuance of the New Notes.
K. Consummation of the New Notes Transaction
80. On or about February 14, 2002, Beth Satterfield, Ronald Wray, Louis Manetti, and Mark Agnew, of Glencoe Capital, sent a Memorandum (with attachments) to Glencoe Partners Investment Committee regarding the New Notes transaction. The memo stated: “It is the deal team’s opinion that Glencoe Capital Partners II, L.P. will likely have the opportunity to invest, in the aggregate, approximately $3,000,000 in this security.” The memo contains the following conclusion:
*829 Conclusion:
It is the deal team’s recommendation that Glencoe Capital Partners II, L.P. invest in this security. The projected IRR for the security, with exit at 12/31/06, is 63.2% with upside potential. The deal team further recommends that Glencoe purchase up to its concentration limit of its allocation of the unsubscribed portion the $6 million security to enhance Glencoe Capital Partners II, L.P.’s blended returns.
The ninth (9th) page of the memorandum compared Glencoe Partners’ anticipated returns from the New Notes against its total equity investment in SESC. In each scenario, the model showed that Glencoe Partners would achieve a “blended return” on its prior equity contribution if it purchased up to its concentration limit of the New Notes. 101 The tenth (10th) page of the memorandum depicted a waterfall showing how funds would be distributed to the various tiers of debt and equity upon a sale of SESC in 2004, 2005, or 2006, assuming a 6.7X exit multiple. 102 That page also compared the anticipated realization from Glencoe Partners’ “Original Common Equity Investment,” to the anticipated realization on its “Recapitalization Investment” (ie., the New Notes). That page showed that, in a sale of SESC in 2006, if Glencoe Partners purchased $3 million in New Notes, it would realize a profit of $23.6 million with an 18.1% internal rate of return (IRR) on its total investment of old equity and New Notes. Thus, in looking at its IRR, Glencoe Partners was anticipating a future sale of SESC. Additionally, the court finds that even though Glencoe Partners was including its prior equity contribution in its IRR, it was doing so merely to give its Investment Committee a picture of how their entire investment in SESC was going to look if and when a future sale occurred.
81. On February 19, 2002, the Board held another meeting. The minutes of that meeting reflect that Beth Satterfield summarized the current state of negotiations with respect to the New Notes transaction and the amendment to the Credit Agreement. The minutes of that meeting reflect that Ms. Satterfield noted that $1,567,915.3752 in New Notes were not elected to be purchased by the existing shareholders and the Board should reallocate that amount for purchase. The minutes of that meeting reflect that the Board approved a motion to offer the unsubscribed portion of the New Notes to the following entities in the following amounts:
Glencoe Capital Partners II, L.P. $1,187,200
Massachusetts Mutual Entities $90,357.6876
State of Michigan $90,357.6876
Kevin Bruce $150,000
Jay Goldstein $15,000
Bill Aisenberg $10,000
Ed Poore $25,000
The minutes of that meeting further reflect that the Board further authorized “that to the extent Glencoe Growth Closely-Held Business Fund, L.P. (‘Fund I’) does not purchase its full pro rata allocation of 15% Notes, the difference between the full pro rata allocation and the amount actually purchased by Fund I shall be *830 allocated equally between the State of Michigan and the Massachusetts Mutual entities.”
82. The New Notes transaction was consummated on March 8, 2002. 103 On March 8, 2002, SESO and its senior lenders entered into the Second Amended and Waiver to Credit Agreement (“Second Amendment”). Pursuant to Section 3 of the Second Amendment, the senior lenders (which included LaSalle and the other three lenders mentioned previously) waived SESC’s breaches and financial covenants for the fiscal quarters ending June 30, 2001, September 30, 2001 and December 31, 2001. The lenders agreed to waive the penalty interest rate increase due to SESC’s breach of the financial covenants of its Credit Agreement.
83. The lenders also agreed to relax the financial covenants which SESC had breached in the preceding fiscal quarters. For example, Section 2 of the Second Amendment allowed for a fixed charge coverage ratio or .90:1.00 for the quarter ending March 31, 2002, and a ratio of 1:1 for the quarter ending June 30, 2002 and thereafter. Prior to the Second Amendment, the minimum fixed charge coverage ratio for the quarter ending March 31, 2002 was 1:05:1, and it increased in increments up to 1.20:1.00 by September 30, 2003.
84.The lending banks also agreed to revise three EBITDA-related covenants, which were changed from the “Old” covenants to the “Modified” covenants as follows:
• The “Senior Debt to Adjusted EBIT-DA Ratio” was relaxed as follows:
Period Ending Old Covenant Modified Covenant
June 30, 2002 2.50 to 1.00 4.70 to 1.00
September 30, 2002 2.50 to 1.00 4.35 to 1.00
December 31, 2002 2.00 to 1.00 4.00 to 1.00
December 31, 2004 1.25 to 1.00 2.30 to 1.00
• The “Total Debt to Adjusted EBITDA Ratio” was relaxed as follows:
Period Ending Old Covenant Modified Covenant
June 30, 2002 4.50 to 1.00 8.45 to 1.00
September 30, 2002 4.50 to 1.00 7.80 to 1.00
December 31, 2002 4.00 to 1.00 7.50 to 1.00
December 31, 2004 3.25 to 1.00 2.30 to 1.00
• The Minimum EBITDA covenant was relaxed as follows:
Period Ending Old Covenant Modified Covenant
March 31, 2002 $13,500,000 $ 5,350,000
June 30, 2002 $13,950,000 $ 6,110,000
September 30, 2002 $14,350,000 $ 7,555,000
December 31, 2002 $14,930,000 $ 8,045,000
December 31, 2004 $16,700,000 $10,765,000
*831 85.The senior lenders also agreed to a modify the amortization schedule for the Term A and Term B loans, as shown below:
_Original Amortization (9/11/00 Agreement) Amended
Original Amortization
Year_Term A_Term B_(A Plus B)_(LI 04166)
2002_$3,530,000 $ 135,000 $ 3,665,000 $ 2,135,000
2003_$3,870,000 $ 135,000 $ 4,005,000 $ 2,835,000
2004_$2,435,000 $ 5,400,000 $ 7,835,000 $ 5,039,000
2005_$0 $ 7,590,000 $ 7,590,000 $10,690,000
Totals $9,835,000 $13,260,000 $23,095,000 $20,699,000
The modified amortization schedule reduced principal repayments in the amount of $1,530,000 in 2002, $1,170,000 in 2003, and $2,796,00 in 2004, and increased the repayment of principal in 2005 by $2,796,000.
86. As demonstrated above, the New Notes transaction allowed SESC to enter into much more favorable terms with its senior lenders. In fact, Jay Goldstein, SESC’s CFO, testified that “from the company’s perspective, the company was better off after the issuance of the new notes than it was right before.” 104
87. The ARSPA was also made effective as of March 8, 2002. Section 29 of the ARSPA, contains the following language: “Each Purchaser under this Agreement or the Other Securities Purchase Agreements, in its capacity as a holder of Securities and Seller Notes, as the case may be, hereby expressly agrees and reaffirms that (a) each of Subordination Agreement and the Junior Subordination Agreement remains in full force and effect with respect to it on and after the Closing date, (b) the Securities and the Seller Notes constitute “Junior Debt” (as defined in the Subordination Agreement) and are subject to the terms and conditions of the Subordination Agreement, and (c) the Seller Notes constitute “Subordinated Indebtedness” (as defined in the Junior Subordination Agreement), the Notes and any amounts payable in connection therewith constitute “Senior Indebtedness” (as defined in the Junior Subordination Agreement) and each of the Seller Notes and the Notes are subject to the terms and conditions of the Junior Subordination Agreement.”
88.Section 19(a) of the ARSPA also contained language providing that the holders of 80% in amount of the New Notes could waive payment of any and all amounts due on the New Notes without the consent of the holders of the other 20% in amount of the New Notes (the “80% Waiver Provision”). 105 It is undisputed that the minutes of the meetings of the Debtor’s Board of Directors held prior to March 8, 2002 do not mention the 80% Waiver Provision. It is also undisputed that the Lincoln Partners’ report did not mention the 80% Waiver Provision. Finally, it is undisputed that the Subscription Booklet and the Supplement did not mention the 80% Waiver Provision. The Plaintiffs have argued that this was a material provision which should have been disclosed in a more obvious fashion than just being interlaced within a 200+ page document (ie., the ARSPA), and have further argued that Glencoe Capital purposely inserted *832 the 80% Waiver Provision in order to gain decision making control over when the New Notes were paid. However, when asked if he thought whether a reasonable investor would want to know about this provision before investing in the New Notes, Scott Williams, the lawyer for SESC and Glencoe Capital, who, along with the attorneys at Mass Mutual, drafted the ARSPA, credibly testified that:
I think a reasonable investor would read the entire agreement before they sign that purchase agreement and send in their money. You know, I don’t think it’s something that anybody would base their decision on because I think it’s a very common and typical provision in an agreement with multiple note holders that it’s less than a 100 percent approval to amend things.
I’m not so sure that the 80 percent provision even comes into play with respect to this waiver of the change of control because that is a waiver of a provision. It’s not an amendment. There was a 51 percent approval requirement for waivers other than specific things. And this was not a change of the provision. This was a waiver of an event that lead to a payment obligation ... I just think that’s a pretty common provision when you have multiple note holders to allow for things to be changed with less than all of the people consenting. 106
On the reasoning behind not disclosing the 80% Waiver Provision, Scott Williams further credibly testified that:
A: I don’t believe that that was something that needed to be disclosed.
Q: Okay. But someone made the decision not to put that disclosure into the subscription booklet, correct?
A: Well, someone decided what went into the subscription booklet. I don’t ever recall anyone specifically considering whether or not to include the amendment provision. I just — I’ve said this before. To me, it’s such a common provision that it didn’t get that much thought as far as disclosure. I’m sorry, that’s just my view of it.
Q: Such a common provision Lincoln Partners didn’t even mention it?
A: Yeah. I just don’t think it’s uncommon to have supermajority amendment provision.
Q: So common that Kevin Bruce didn’t know about it?
A: I don’t know what Kevin knew or didn’t know.
Q: So common Jay Goldstein didn’t know about it.
A: I don’t know what Jay knew or didn’t know.
Q: Is it your testimony that nobody made the decision not to put the eighty percent waiver provision in the amended 24 restated securities purchase agreement?
A: Yes. I don’t think there was an affirmative decision, let’s not put that in.
Q: Okay. Just — no one decided that it was important enough to put it in. A: Correct. 107
Moreover. Beth Satterfield, a principal at Glencoe Capital credibly testified:
Q: All right. Ms. Satterfield, we’ve talked about this before. This is the eightypercent waiver provision. You’ve seen that. Did you instruct McDermott Will & Emery to put this provision into the document?
A: No.
*833 Q: Okay. Did — all right. If you didn’t, who did?
A: I don’t — I didn’t — I don’t believe anybody instructed them to do it.
Q: Did anyone suggest that they do it?
A: I’m going to assume no.
Q: Okay. Now, this provision allows the holders of eighty percent an amount of the new notes to consent to waive the debtor’s obligation to pay the instrument, right?
A: Consent to waive it at that time—
Q: Yes.
A: — not permanently.
Q: Well, waive it at that time, right?
A: Yes.
Q: And there’s no limit on how long it could be waived, right?
A: Correct.
Q: All right. Now, in your view, this provision was just too trivial to mention to the board of directors, right?
A: Are you quoting me?
Q: Yes.
A: Did I say “trivial”?
Q: Yes.
A: Okay. Then yes.
Q: And wouldn’t a reasonable investor have wanted to know about this provision before investing in the new notes? A: I think a reasonable investor would want to make sure, in a large group, that one — a one-percent holder couldn’t affect the — a long-term outcome of an investment.
Q: Ms. Satterfield, wouldn’t a reasonable investor — particularly a reasonable minority investor — want to know that the holders of eighty percent an amount could vote to postpone his right to payment indefinitely?
A: I think — I—I don’t agree.
Q: Okay.
A: This is immaterial.
Q: Okay. Provision’s not material? That’s your testimony?
A: Correct. 108
Based on the totality of the evidence (including this and other testimony), the court does not find that the 80% Waiver Provision was material enough to warrant specific discussions at the Board meetings or even inclusion in Tab 4 of the Subscription Book (which was a summary of the terms of the New Notes). In particular, the court finds Scott Williams’ testimony on the issue of materiality convincing, and that under the circumstances, the inclusion of this type of provision made good business sense and was a common provision in note instruments where there were to be multiple holders. Moreover, the court cannot find that the Plaintiffs have demonstrated that Glencoe Capital was the reason for placing this provision in the ARS-PA, but rather finds that the provision was ultimately included based upon MWE’s belief that it was in the best interest of the SESC entity to do so.
89. Finally, as part of the New Notes transaction, two new Subordination Agreements were also executed:
a) Junior Subordination Agreement, dated March 8, 2002, by among Strategic Equipment and Supply Corporation, Gernsbacher’s, Inc., Medley Restaurant Equipment & Supply, Inc., Palm Brothers, Inc., Top of the Table, Inc., Scruggs, Inc., St. Cloud Restaurant and Supply Company, and LaSalle, N.A., as Administrative Agent (the “March Junior Subordination Agreement”); and
*834 b) Subordination Agreement, dated March 8, 2002, among Strategic Equipment and Supply Corporation, Gerns-bacher’s, Inc., Medley Restaurant Equipment & Supply, Inc., Palm Brothers, Inc., Top of the Table, Inc., Scruggs, Inc., St. Cloud Restaurant and Supply Company, W.H. Reynolds Distributor, Inc., W. David Campbell, S. Reed Jackson, Andrew Scruggs, Walter Eskuri, Harold Gernsbacher, Jr., Ronald L. Bane, Thomas M. Garvin, Zintgraff Investments, Ltd., Kevin P. Bruce, Ed Poore, Bill Aisenberg, Jay Goldstein, Thomas L. Bindley Revocable Trust, Glencoe Capital Partners, II, L.P., State of Michigan, Massachusetts Mutual Life Insurance Company, MassMutual Yield Partners, II, LLC, MassMutual Corporate Investors, and MassMutual Participation Investors (the “March 8 Subordination Agreement”). 109
However, the court finds that neither of these two subordination agreements provides for the subordination of the Seller Notes to the New Notes. Rather, the March Junior Subordination Agreement subordinated the New Notes to the La-Salle debt, and the March 8 Subordination Agreement subordinated the New Notes to the Mass Mutual debt.
L. Terms and Characteristics of the New Notes in Their Documented Form
90.The New Notes were issued pursuant to the ARSPA, which was an “amendment and restatement” of the SPA governing SESC’s issuance of the 12% Mass Mutual Notes in January of 2000. 110 The instruments evidencing the New Notes on their face state they are “15% Junior Subordinated Notes Due January 8, 2002.” The New Notes appear in SESC’s audited financial statements in the section titled Long-Term Debt. The New Notes were fully subordinated to outside senior secured lenders and the Mass Mutual 12% Notes. SESC did not establish or fund a sinking fund for purposes of making any payments under the New Notes. Prior to February 2005, the New Notes were not secured by a lien. The New Notes did not call for periodic interest payments and instead called for PIK interest at a 15% per annum interest rate which was to accrue until maturity or until a change in control or sale event. The New Notes did not require any periodic repayment of the principal amounts of the Note prior to maturity. The New Notes had a scheduled maturity date. All of the holders of the New Notes were SESC shareholders. The New Notes were offered to SESC’s shareholders in direct proportion to their equity interests in SESC.
91.The New Notes also provided for a minimum Additional Payment as follows:
If the sale of SESC occurs prior to 12/31/03, the holders of the New Notes shall receive 25% of all sales proceeds, on a pro rata basis, remaining after payment in full of all senior indebtedness of the Company, the Existing Subordinated Notes (the 12% MassMutual Notes) and the New Notes (the “Additional Payment”). If the sale of SESC occurs after 12/31/03, the holders of the New Notes shall receive the greater of the Additional Payment or the following:
Date of Sale Amount
1/01/04-12/31/04 $ 8,700,000
1/01/05-12/31/05 $12,400,000
1/01/06-12/31/06 $15,500,000
1/01/07-thereafter $17,900,000
92.The holders of the New Notes also received warrants for 2,749,403.0446 *835 shares of common stock in the Debtor, which shares represented 60% of the fully diluted equity of the company. 111 Prior to the New Notes transaction, the Glencoe Investors held 66.60% of the stock of SESC. 112 As a result of the New Notes transaction, the Glencoe Investors held 82.26% of the stock in SESC. 113
M. The New Notes Sources and Uses of Funds
93.The following persons and entities purchased New Notes on or about March 8, 2002 in the following principal amounts:
David Campbell $ 60,000
S. Reed Jackson $ 60,000
Robert N. Zintgraff (Zintgraff Investments) 114 $ 75,000
Andrew Scruggs $ 40,000
Walter Eskuri $ 6,000
Harold Gernsbacher $ 200,000
Glencoe Growth Closely Held Business Fund $ 45,000
State of Michigan $1,221,354.43
Massachusetts Mutual Life Ins. Company $ 610,387.64
MassMutual High Yield Partners II, LC. $ 252,696.79
Ronald L. Bane $ 77,771.24
Thomas M. Garvin $ 9,962.98
Glencoe Capital Partners II, L.P. $3,124,999.87
Jay L. Goldstein 115 $ 16,992.59
Thomas L. Bindley Revocable Trust 11/5/1975 $ 14,944.46
Kevin Bruce 116 $ 150,000
Ed Poore $ 25,000
Bill Aisenberg $ 10,000
94. As reflected in the top six entries above, six Plaintiffs purchased New Notes that aggregated to 7.35% of the total principal amount of New Notes, e.g., $441,000. However, a total of 33.27% of the total principal amount of the New Notes were made available for purchase by such Plaintiffs.
95. Subsequent to the New Notes transaction, the State of Michigan transferred its New Note to Stockwell Fund, L.P., which is the current holder of such New Note. On March 17, 2006, Glencoe Partners acquired the New Note originally held by Jay L. Goldstein. On June 26, 2008, Glencoe Partners acquired the New Note originally held by Ronald L. Bane.
96.The $6 million in proceeds from the sale of the New Notes were used as follows: (a) $2.4 million was used to reduce the senior indebtedness owed to LaSalle; (b) approximately $1.9 million to SESC for general corporate purposes; (c) $633,499.97 was used to pay interest owed *836 the holders of the 12%; Mass Mutual Notes, and pay fees and expenses; (d) $375,000 was used to pay past due management fees to Glencoe Capital; (e) $644,126.80 was used to pay fees and expenses other than MWE’s legal fees; and (f) $196,121.49 was paid to MWE for legal fees for the time period October 1, 2001 through February 28, 2002.
N. SESC’s Financial Performance Both Before and After the Issuance of the New Notes
97.To better understand how the New Notes transaction was reflected on SESC’s books and records, the following chart sets forth a summary of SESC’s long-term liabilities as set forth in the SESC’s audited financial statements, including after the addition of the New Notes:
Date 01/14/00 12/31/00 2001 2002 2003 2004
Term A Senior note, $10,500,000 $12,250,000 $9,835,000 $5,435,000 $2,735,000 $1,185,000 maturing 2004
Term B Senior note, $10,500,000 $13,395,000 $13,260,00 $13,125,000 $12,990,000 $11,490,000 maturing 2005
Senior revolving credit $8,223,406 $10,000,000 $16,000,000 $13,000,000 $15,000,000 $20,300,000 facility, maturing 2004
12% Senior subordinated $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000 promissory notes, maturing 2008
15% Senior subordinated N/A N/A N/A $6,000,000 $6,770,000 $7,799,604 promissory notes, maturing 2008
9% Junior subordinated $8,214,000 $10,170,266 $15,282,838 $15,282,838 $15,282,838 $15,282,838 promissory notes, maturing 2008-2010
Other $41,693 $478,777 $545,801
Less: debt discount related ($1,703,000) ($1,723,194) ($1,484,354) ($1,240,346) ($996,338) ($752,330) to warrants issued
Subtotal $45,776,099 $54,09 2,072 $62,893,485 $61,602,492 $62,260,277 $65,850,913
Less: current maturities ($ 9,612,856) ($12,550,000) ($2,135,000) ($2,835,000) ($20,490,701) $41,266,816
Long-term debt $36,163,243 $41,542,072 $60,758,484 $58,767,492 $41,769,576 $24,584,097
98. The figures above do not include the accrued interest on the Seller Notes or Additional Payment required on the New Notes upon a change in control or sale event.
99. The following chart sets forth a summary of SESC’s total debt, adding the current liabilities (including, among other things, trade debt and current maturities) to the long term debt, as reflected on SESC’s audited consolidated balance sheets for years 2000 through 2004:
*837 Date 01/14/00 12/31/00 2001 2002 2003 2004
Long-term debt $36,163,243 $41,642,072 $60,768,484 $68,767,492 $41,769,676 $ 24,684,097
Current Liabilities $31,169,879 $35,522,473 $19,065,509 $27,356,751 $48,285,105 $ 81,384,099
Other Liabilities$ 1,088,000 $ 815,880 $ 727,295 ——
Total Debt $68,411,122 $77,910,159 $80,551,288 $86,124,243 $90,054,681 $105,968,196
100.The following chart sets forth SESC’s tangible net worth calculation through December 31, 2004:
Date 01/14/00 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
Stockholder Equity $23,015,265 $30,146,864 $26,347,878 $26,843,464 $11,207,267 ($19,225,222)
Less Goodwill and Other In- ($56,715,897) ($61,207,922) ($62,543,496) ($62,775,840) ($46,857,166) ($14,792,958) tangible Assets
Tangible Net Worth ($33,700,632) ($31,061,058) ($36,175,618) ($33,932,376) ($35,649,899) ($34,018,180)
101. Moreover, SESC’s EBITDA for 2000-2004 was $10,902,611, $6,937,537, $9,197,881, and $10,862,013, respectively.
O. The February 2005 Brazos Transaction
102. Subsequent to March 8, 2002, SESC continued to fail to meet its financial projections. In late 2004, SESC engaged the financial firm BB & T to offer all or substantially all of SESC’s assets for sale to potential purchasers. During that same time period, certain of the Seller Noteholders sent a letter to Terry Malone, who was chairman of the Board of SESC at the time, discussing the possibility of acquiring a controlling interest in SESC as an option in the event that there was no offer forthcoming from the efforts by BB & T. 117
103. However, the so-called Brazos Transaction ultimately ended up going forward and, specifically, Strategic Acquisition, Inc., a new entity formed by Brazos Private Equity Partners, acquired substantially all SESC’s assets on February 14, 2005, for $46,520,000 in cash, which amount was sufficient to pay the senior debt owed to LaSalle, the 12% Mass Mutual Notes, and to return approximately $646,608.49 in cash to SESC, which ceased operations. At closing, Kevin P. Bruce, the former CEO of SESC appointed by Glencoe Capital, received a bonus payment in the amount of $825,000.00. 118 MWE received $825,000.00 in fees and expenses for its role as SESC’s counsel. 119 Glencoe Capital also obtained the right to receive a management fee in the amount of $1 million, paid in annual installments over ten years, by New Strategic. 120
104.Strategic Acquisition, Inc. continued the business of SESC and changed its name to Strategic Equipment and Supply Corporation, the name under which the *838 Debtor had previously operated (“New SESC”)- SESC changed its name to Equipment Equity Holdings, Inc., which is the Debtor’s current name.
105. In addition to the $46,520,000, the purchase price consideration included the receipt by SESC of 26% of the stock in New SESC, which has subsequently been reduced to approximately 11% to 15%, depending on certain rights held by third parties.
106. Subject to the terms of the ARS-PA, this transaction triggered SESC’s obligation to redeem the New Notes and pay the principal, accrued interest, and the Additional Payment amount. Certain of the New Noteholders, however, executed a Standstill and Amendment Agreement, dated February 14, 2005, in which the New Noteholders agreed to forebear from exercising their rights and remedies pursuant to the SPA to collect all obligations due as a result of the sale until the earliest of the following occur: (a) December 31, 2007, (b) the exercise by any holder of 9% Seller Notes of any of his, her or its rights or remedies to collect any amount under the 9% Seller Notes prior to the irrevocable payment in full of the 15% notes, (c) any Event of Default shall have occurred under Section 16.1(e), (f), or (g) of the SPA, (d) the 15% noteholders are determined not to be in a perfected first priority lien position in the assets of SESC, (e) SESC’s sale, transfer or other disposition of any of its assets including, without limitation, any of the Rollover Equity or the Earnout Payments without the prior written consent of the Majority 15% Holders (note-holders representing 80% of outstanding principal), (f) the occurrence of any breach of this agreement (the “Standstill and Amendment Agreement”) by SESC, or (g) delivery of written notice by the Majority 15% Holders to SESC that the Standstill and Amendment Agreement is terminated. Interestingly, two of the Plaintiffs in this case executed the Standstill and Amendment Agreement (Andrew Scruggs and Walter Eskuri).
107. Certain of the New Noteholders also executed a Release, dated February 14, 2005, which provides that the holders of the New Notes release each of SESC’s operating companies and each subsidiary guarantor from any and all obligations arising from or related to the New Notes. The release did not extend to SESC.
108. On February 14, 2005, SESC executed a Security Agreement giving the holders of the New Notes a security interest in all assets of SESC, including dividends and proceeds from SESC’s stock in New Strategic. The Plaintiffs did not sign the Security Agreement. Beth Satterfield executed the Security Agreement on behalf of SESC as its Vice President, and on behalf of Glencoe Capital, as a secured party. Robert Shettle executed the Security Agreement on behalf of the Mass Mutual entities, as secured parties, in their capacities as holders of New Notes.
109. On or about February 17, 2005, SESC sent a letter for which all Plaintiffs were included in the distribution list stating as follows: “Holders of greater than 80% of the principal amount of the 15% Notes have agreed to forebear from the exercise of any collection actions regarding the amount due on the 15% notes until the disposition of SESC’s retained interest in Recapitalized SESC (or such other time as they reasonably determine to be necessary to protect their rights or remedies.) This forbearance provides all stakeholders with the opportunity to potentially share in any growth in the value of SESC’s retained interest in the Recapitalized SESC.” At least three Plaintiffs (Harold Gernsbacher, Jr., Robert Zintgraff and Reed Jackson) testified that this was the first time that *839 they learned of the existence of the 80% Waiver Provision. 121
110. Following the sale of SESC’s assets to New SESC, various Plaintiffs, including Gernsbacher, Zintgraff, and members of the Palm family demanded payment of their New Notes and/or their Seller Notes. SESC informed them that more than 80% of the holders of the New Notes had exercised the 80% Waiver Provision. In August 2005, Mr. Gernsbacher, Mr. Zintgraff, and various members of the Palm family sued SESC, Glencoe Capital, LLC, Glencoe Capital Partners II, L.P., and various former officers and directors of the Debtor in State District Court in Tarrant County, Texas for alleged damages and fraudulent transfer liability related to the New Notes transaction. That lawsuit was still pending when the involuntary petition was filed on December 1, 2009.
111. In November 2007, SESC received $2,757,000 as a result of a recapitalization dividend from New SESC. Approximately $1 million of that amount was held in an escrow account at Bank of America as collateral for obligations owed by New SESC, and was not distributed to SESC at that time. The Debtor did not disclose the receipt of the recapitalization dividend to any of the Plaintiffs until after the involuntary petition in bankruptcy was filed. Plaintiffs did not request this information from the Debtor prior to that time. Between November 2007 and May 25, 2010, SESC spent approximately $1.5 million of the recapitalization dividend on various expenses, including fees and costs incurred in connection with the state court litigation with Messrs. Gernsbacher, Zintgraff, and members of the Palm family.
P. The Bankruptcy Proceedings
112. On December 1, 2009, certain Plaintiffs — Michael N. Palm, Shannon Palm, Kristen Palm, Harold Gernsbacher, Jr., Robert N. Zintgraff, and Zintgraff Investments, Ltd. — filed an involuntary petition in bankruptcy against SESC. Following six (6) months of litigation, SESC consented to the entry of an Order for Relief, which was entered on May 25, 2010. The Debtor immediately converted its Chapter 7 case to a case under Chapter 11, and converted it back to Chapter 7 on August 24, 2010. Shortly thereafter, Robert Yaquinto, Jr. (the “Trustee”) was appointed as Chapter 7 Trustee.
Q. The Adversary Proceeding
113. The Plaintiffs in this proceeding are all of the holders of the Seller Notes. Each of the Defendants holds one or more New Notes. As previously stated, this Adversary Proceeding is a dispute about payment priority between the holders of the Seller Notes and certain holders of the New Notes.
IV. CONCLUSIONS OF LAW
114. The Plaintiffs have essentially asserted two broad theories for elevating the Seller Notes ahead of the New Notes: (1) various subordination/recharacterization theories; and (2) a theory that Plaintiffs are entitled to a declaratory judgment regarding unenforceability of documents. Within the first category, the Plaintiffs have first sought to equitably subordinate the New Notes pursuant to section 510(c) of the Bankruptcy Code, or alternatively to recharacterize the New Notes as equity under the case law doctrine of recharacter-ization. The Plaintiffs have also asked the *840 court to subordinate the New Notes pursuant to section 510(b) of the Bankruptcy Code. However, to the extent the court does not find that recharacterization or subordination of the New Notes is appropriate, the Plaintiffs have pursued a second avenue to elevate the Seller Notes to the New Notes. Specifically, the Plaintiffs have sought a declaratory judgment that the documentation which effectively subordinated the Seller Notes to the New Notes (i.e., the ARSPA) is unenforceable against the Seller Noteholders, and, thus, that the Seller Notes were not ev

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8495887. Public record. Not legal advice.