Appendix — DFA Investment Dimensions Group Inc. v. Munford, Inc., 118 S. Ct. 738 (1998) (No. 97-550)

App. 1

Matter of MUNFORD, INC., a/k/a

Majik Market, Debtor.

Danné Brokaw MUNFORD, as Executrix of the Estate of

Dillard Munford; James M. Carroll; Russell Fellows;

Joseph W. Hardin; Jay Rubel; Winston M. Blount;

Herbert J. Dickson; James L. Ferguson; Robert M.

Gardiner; Richard K. Leblond; Andrall E. Pearson; S.B.

Rymer, Jr., Shearson Lehman Brothers, Inc.; DFA In-

vestment Dimensions Group, Inc.; State Street Bank &

Trust Company; PNC Bank, National Association; Boston

Safe Deposit and Trust Company, Plaintiffs-Appellees,

Vv.

VALUATION RESEARCH CORPORATION,

Defendant,

Munford, Inc., Defendant-Appellant.

No. 94-9046.

United States Court of Appeals,

Eleventh Circuit.

Oct. 28, 1996.

Before HATCHETT, Chief Judge, CLARK, Senior Cir-

cuit Judge, and MILLS,* District Judge.

PER CURIAM:

As a matter of first impression in this circuit, we hold

that 11 U.S.C. § 546(e) does not bar the trustee in bank-

* Honorable Richard Mills, U.S. District Judge for the Central

District of Illinois, sitting by designation.

App. 2

ruptcy from avoiding payments the debtor corporation

made to its shareholders in a leveraged buy-out.

FACTS

In August 1987, Dillard Munford, the founder and chief

executive officer of Munford, Inc., suggested to Munford,

Inc.’s board of directors (the board) that it sell Munford,

Inc. At that time, Munford, Inc., a public company, oper-

ated three specialty retailer stores: Majik Market, a

chain of convenience stores; World Bazaar, a chain of

stores specializing in imported goods; and Lee Ward’s

Creative Crafts, an arts and crafts chain. Munford, Inc.

also owned a majority interest in United Refrigerator

Services, Inc. (URS). Based on Dillard Munford’s sugges-

tion, the board retained Shearson Lehman Brothers

(Shearson) to evaluate Munford, Inc.’s financial viability

and its fair market value. Following this evaluation,

Shearson would make recommendations regarding how

to best maximize shareholder value in the event the

board decided to sell Munford, Inc.

In September 1987, Shearson presented a written re-

port to the board identifying several selling options.

Shearson, for example, opined that a sale of all of

Munford’s common stock would afford Munford, Inc. the

most desirable means of maximizing shareholder value

while preserving its financial viability. In contrast,

Shearson disfavored a leverage buy-out (LBO) or a lev-

erage recapitalization opining that Munford, Inc. would

need all of its internally generated cash flow to fund

growth. Consequently, Shearson believed that Munford,

Inc. could not carry the heavy debt load associated with

a leverage transaction. After reviewing Shearson’s re-

;

App. 3

port, the board authorized Shearson to prepare an offer-

ing memorandum and solicit potential purchasers for

Munford, Inc. During this same period of time, Munford,

Inc. executed severance contracts with senior officers

Dillard Munford, Russell C. Fellows, and James M. Car-

roll agreeing to pay these officers severance pay in yearly

installments upon the closing of the sale of Munford, Inc.

In exchange, these officers promised to continue their

employment with Munford, Inc. until it secured a pur-

chaser. Despite Shearson’s aggressive efforts to solicit

potential purchasers of Munford, Inc., no one offered to

purchase all of Munford, Inc.’s common stock. Faced with

this reality, the board began considering LBO offers.

In January 1988, Deutschman & Co. offered to pur-

chase Munford Inc.’s stock in an LBO. In February 1988,

the board tentatively agreed to sell Munford, Inc. to

Deutschman, but Deutschman withdrew its offer on

March 3, 1988, after performing a due diligence exami-

nation. On May 2, 1988, Munford, Inc. sold its Lee

Ward’s stores to Prudential Bache because it had failed

to secure a single purchaser for Lee Ward’s stock. Later

that month, the board received an offer from the Panfida

Group to purchase its Majik and World Bazaar stores for

$18.50 per share. On May 23 the board met with its

lawyers and Shearson’s representatives to consider the

Panfida Group’s offer. At that meeting, Munford Inc.’s

lawyers advised the board that they had consulted with

Citicorp and Citicorp confirmed its willingness to work

with the Panfida Group. Shearson also advised the board

that the Panfida Group had the backing of a company

with assets in excess of $60 million. In addition, Shear-

son’s representative stated that he was favorably im-

pressed with the Panfida Group’s ability to obtain financ-

App. 4

ing. On June 1, 1988, Phillip Handy, the spokesperson

for the Panfida Group, met with the board to discuss the

proposal. During the meeting, Handy informed the board

that the Panfida Group had purchased 291,177 shares of

Munford, Inc. stock as evidence of its commitment to

purchase Munford, Inc. Handy also noted that the Pan-

fida Group intended to put additional capital into the

company; however, he also advised the board that Pan-

fida’s equity participation would only be as much as

Citibank required to finance the purchase.

On June 17, Munford, Inc. sold its stock in URS for

$45.5 million and used the proceeds to pay company

debt. Also during the month of June, the Panfida Group

and Citicorp began a due diligence examination of Mun-

ford Inc.’s business records. After discovering potential

environmental liability at some of the Majik stores, the

Panfida Group decided to reduce its purchase price from

$18.50 a share to $17 a share. The board approved the

Panfida Group’s new offering price and the proposed

merger agreement. The proposed merger agreement

required the Panfida Group to create Alabama Acqui-

sition Corporation (AAC) and a subsidiary, Alabama

Merger Corporation (AMC). The merger agreement also

required the Panfida Group through AAC or AMC to

deposit the funds necessary to purchase Munford Inc.’s

outstanding stock with Citizens & Southern Trust Com-

pany, a financial institution within the securities clear-

ance and settlement system.

Prior to finalizing the merger plan, AAC warranted to

the board that the post-merger Munford, Inc. would re-

main solvent, would have a reasonable amount of work-

ing capital, and would have the ability to pay its debts

as they came due. After receiving this assurance, Mun-

ae Tet

App. 5

ford, Inc.’s lawyers prepared a detailed proxy statement

for Munford, Inc.’s 3,100 shareholders outlining the mer-

ger agreement.’ On October 18, 1988, the shareholders

approved the merger plan. As provided in the merger

agreement, each share of common stock was converted

into the right to receive the merger price of $17 per

share and extinguished the shareholders’ ownership in-

terest in Munford, Inc. The Panfida Group retired the

291,177 shares it purchased prior to the LBO merger

without payment. The sale of Munford, Inc. to the

Panfida Group closed on November 29, 1988. Thirteen

months after the LBO transaction, on January 2, 1990,

the post-Munford Corporation filed a Chapter 11 case in

bankruptcy court.

PROCEDURAL HISTORY

On June 17, 1991, Munford, Inc. filed an adversary

proceeding in bankruptcy court in the Northern District

of Georgia on behalf of itself and unsecured creditors

pursuant to 11 U.S.C. §§ 544(b) and 1107(a) (1988), seek-

ing to recover LBO payments made to Munford, Inc.’s

shareholders, severance payments made to Munford,

Inc.’s officers and damages against directors, officers,

and Shearson for breach of fiduciary obligations to

Munford, Inc.

In Count I of Munford, Inc.’s complaint, it asserts

fraudulent conveyance claims against two of Munford,

* Munford, Inc.’s shareholders had no dissenter’s rights of ap-

praisal under O.C.G.A. § 14-2-250(d\(2) ( 1988), because Mun-

ford listed its shares on the New York Stock Exchange and

because more than 2,000 shareholders held the stock.

App. 6

Inc.’s largest former shareholders, the DFA Investment

Dimensions Group, Inc. and Trustees of the DFA Group

Trust. In Count I, Munford, Inc. also asserts fraudulent

conveyance claims against former directors and officers

who received payments for their Munford, Inc. shares in

the LBO.’ In Counts II and IV, Munford, Inc. asserts

breach of fiduciary duty, negligence, mismanagement,

and waste of corporate assets claims against the officers

and directors. In Count III, Munford, Inc. asserts that

the directors violated Georgia’s share repurchase and

distribution statutes in approving the LBO transaction.

In Count V, Munford, Inc. asserts that the severance

payments made to Dillard Munford, Fellows, and Carroll

constituted fraudulent conveyances. In Count VI, Mun-

ford, Inc. claims that Shearson breached its fiduciary

duty. Finally, in Count IX Munford, Inc. claims that

Shearson aided and abetted the directors and officers’

alleged breaches of fiduciary duty.

The shareholders, directors, officers, and Shearson (col-

lectively appellees) filed motions for summary judgment

contending that each of Munford, Inc.’s claims failed as

a matter of law. On April 5, 1994, the bankruptcy court

filed its proposed findings of fact and conclusions of law

recommending that the district court grant Shearson’s

motion for summary judgment. In a separate proposed

* Count I specifically asserts claims against Dillard Munford,

chief executive officer; Russell C. Fellows, president and chief

operating officer; James M. Carroll, vice president and secre-

tary; Joseph W. Harden, vice president and treasurer; and J.E.

Rubel. Count I also asserts claims against directors Dillard

Munford, Fellows, Robert M. Gardiner, Richard K. LeBlond, II,

Herbert J. Dickson, Winston M. Blount, S.B. Rymer, Jr.,

Andrall E. Pearson, and James L. Ferguson.

App. 7

findings of fact and conclusion of law, the bankruptcy

court recommended that the district court deny the

shareholders, officers, and directors’ motions for sum-

mary judgment. The district court adopted the bankrupt-

cy court’s recommendation in part granting summary

judgment in favor of Shearson. The district court also

adopted the bankruptcy court’s recommendation with

respect to Count III and denied the directors’ motion for

summary judgment on the distribution statute claim.

The district court, however, rejected the bankruptcy

court’s recommendation as to Munford, Inc.’s claims

against the shareholders, directors, and officers with

respect to Counts I, II, and IV, and granted summary

judgment on those counts on August 4, 1994.

On August 26, 1994, the district court amended its

order, pursuant to Federal Rules of Civil Procedure

54(b), and entered final judgment to allow this appeal to

proceed. Munford, Inc. now appeals the district court’s

grant of summary judgment in favor of the shareholders,

officers, and directors on Counts I, II, and IV. Munford,

Inc. also appeals the district court’s granting of summary

judgment in favor of Shearson on Count IX and has

abandoned its claims under Count VI?

CONTENTIONS

Munford, Inc. raises four contentions. First, Munford,

Inc., contends that the district court erred in concluding

that the LBO payment shareholders received for their

* The directors also appeal the district court’s denial of their

motion for summary judgment on Munford, Inc.’s share repur-

chase and distribution claim (Count III) in Case No. 94-9216.

App. 8

shares constituted a settlement payment within the

meaning of 11 U.S.C. § 546(e). Second, Munford, Inc.,

contends that the district court erred in concluding that

its breach of fiduciary duties, negligence, mismanage-

ment, and waste of corporate asset claims against the

directors and officers failed as a matter of law. Specifi-

cally, Munford, Inc. argues that sufficient evidence sup-

ports its claim that the directors and officers failed to

fulfill their fiduciary obligations to evaluate the proposed

LBO merger agreement. Third, Munford, Inc. contends

that the severance payments made to its officers lacked

consideration; therefore, the district court erred when it

concluded that the payments did not constitute a fraudu-

lent conveyance under Georgia law. And finally, Mun-

ford, Inc. contends that the district court erred in grant-

ing summary judgment in favor of Shearson on its aiding

and abetting breach of fiduciary duty claim because

Georgia courts would recognize this claim.

Appellees contend that the district court properly

granted summary judgment in their favor on each of the

claims.

ISSUES

We address the following issues: (1) whether the LBO

payments received in exchange for shares constituted

a settlement payment within the meaning of section

546(e); (2) whether the district court erred in granting

summary judgment in favor of the officers and directors

on Munford, Inc.’s claims of breach of fiduciary duty,

negligence, mismanagement, and waste of corporate

assets; (3) whether Munford, Inc.’s severance payments

to its officers constituted fraudulent conveyances under

wees eee

App. 9

Georgia law; and (4) whether the district court erred in

granting summary judgment in favor of Shearson on

Munford, Inc.’s aiding and abetting claims.

DISCUSSION

A. LBO Payments

We review the grant of summary judgment de novo.

Orlando Helicopter Airways v. United States, 75 F.3d

622, 624 (11th Cir.1996). Summary judgment is appro-

priate where no genuine issues of material fact exist and

the moving party is entitled to judgment as a matter of

law. Canadyne-Georgia Corp. v. Continental Ins. Co., 999

F.2d 1547, 1554 (11th Cir.1993),

Pursuant to 11 U.S.C. § 544(b), a trustee in bankrupt-

cy or the debtor acting as trustee may avoid any transfer

of property of the debtor that is voidable under the ap-

plicable state law unless otherwise stated in the Bank-

ruptcy Code. 11 U.S.C. § 544(b). Section 544(b) is com-

monly referred to as the “strong arm” clause. One ex-

ception to the trustee’s avoidance power exists under

section 546(e). Section 546(e) states in pertinent part:

Notwithstanding section 544 . . . of this title, the

trustee may not avoid a transfer that is . . . [a]

settlement payment, as defined in section 741(8) of

this title, made by or toa commodity broker, forward

contract merchant, stockbroker, financial institution,

or securities clearing agency, that is made before

the commencement of the case, except under section

548(a)(1) of this title.

11 U.S.C. § 546(e) (1988). Congress enacted section

546(e) “to minimize the displacement caused in the

commodities and securities market in the event of a

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App. 10

major bankruptcy affecting those industries.” H.R.Rep.

No. 97-420, 97th Cong., 2d Sess. 1 (1982), U.S.Code

Cong. & Admin.News 583. With the passage of section

546(e), “Coftgress [also] sought to ‘promote customer con-

fidence in @®mjmodity markets generally’ via ‘the protec-

tion of commodity market stability.’” Kaiser Steel Corp.

v. Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir.

1990) (quoting Sen. R. No. 989, 95th Cong., 2d Sess. 8

(1978)).

In this case, the district court entered summary judg-

ment in favor of the shareholders on Munford, Inc.’s

fraudulent conveyance claim finding that the LBO pay-

ments Munford, Inc. made to the shareholders consti-

tuted settlement payments within the meaning of section

741(8). See 11 U.S.C. § 741(8). Consequently, the district

court held that 11 U.S.C. § 546(e) did not authorize a

bankruptcy trustee or a debtor in possession acting as

trustee to avoid such transfers under state law because

the shareholders received their settlement payments

from Citizens & Southern Trust Company, a financial

institution. On appeal, Munford, Inc. contends that the

district court erred in concluding that the LBO payments

the shareholders received for their shares constituted

settlement payments for purposes of section 546(e).

Section 741(8) defines “settlement payment” as “a pre-

liminary settlement payment, a partial settlement pay-

ment, an interim settlement payment, a settlement pay-

ment on account, a final settlement payment, or any

other similar payment commonly used in securities

trade.” 11 U.S.C. § 741(8) (1988) (emphasis added). Mun-

ford, Inc. does not argue that LBO payments are uncom-

mon. Rather, it urges this court to define settlement pay-

ments in the context of LBOs narrowly, asserting that

OO

App. 11

LBO mergers are essentially private transactions be-

tween the merging companies and their existing share-

holders and therefore do not sufficiently involve the

securities settlement and clearance system. Munford,

Inc. notes that this LBO merger did not use the clear-

ance and settlement system to match buyers with sellers

of securities, account for the transaction, or guarantee

the transaction. Munford, Inc. asserts that the settle-

ment and clearance system was simply used to convey

the LBO payments to the tendering shareholders. Mun-

ford, Inc. further argues that characterizing the LBO

payments as settlement payments does not advance the

goal of protecting the clearance and settlement system

because LBO transactions do not utilize the entire clear-

ance and settlement system.‘ Finally, Munford asserts

that construing the LBO payments as settlement pay-

ments wholly frustrates the remedial goal of fraudulent

conveyance law and the fair treatment of unsecured cred-

itors. The shareholders, on the other hand, contend that

construing section 546(e) to apply to the LBO payments

promotes investor confidence in the securities market. To

hold otherwise, the shareholders argue, would undermine

all mergers or acquisitions of public companies.

ACRES EROTIC A RIE LT ee

ODT. Sanilac ON INNES PR aE

Dee ee oo Co ta eS i en ae, er ee Te ere Ue Tn

* In support of its position, Munford, Inc. cites Wieboldt

Stores, Inc. v. Schottenstein, 131 B.R. 655 (N.D.I11.1991). In

Wieboldt, the district court held that LBO payments do not

i constitute a settlement payment within the meaning of the

Code, reasoning that permitting avoidance of LBO payments

posed no significant threat to the clearance and settlement

system in the securities industry. Wieboldt, 131 B.R. at 664-

65. We reject the reasoning of Wieboldt finding that even

granting trustees avoidance powers under limited circumstanc-

es in the LBO context has the potential to lessen confidence in

the commodity market as a whole.

PER Pe ga ae RE ep Ot ty Sed Std BA

App. 12

The court concludes that whether the LBO payments

qualify as section 546(e) settlement payments is not

dispositive of the dispute—in fact, the court will presume

that the LBO payments were settlement payments. Al-

though the payments were presumptively settlement

payments, section 546(e) is not applicable unless the

transfer (or settlement payment) was “made by or to a

commodity broker, forward contract merchant, stockbro-

ker, financial institution, or securities clearing agency.”

11 U.S.C. § 546(e). Here, the transfers/payments were

made by Munford to shareholders. None of the entities

listed in section 546(e)—i.e., a commodity broker, for-

ward contract merchant, stockbroker, financial institu-

tion, or a securities clearing agency—made or received a

transfer/payment. Thus, section 546(e) is not applicable.

True, a section 546(e) financial institution was pre-

sumptively involved in this transaction. But the bank

here was nothing more than an intermediary or conduit.

Funds were deposited with the bank and when the bank

received the shares from the selling shareholders, it sent

funds to them in exchange. The bank never acquired a

beneficial interest in either the funds or the shares.

Importantly, a trustee may only avoid a transfer to a

“transferee.” See 11 U.S.C. § 550. Since the bank never

acquired a beneficial interest in the funds, it was not a

“transferee” in the LBO transaction. See In re Chase &

Sanborn Corp., 848 F.2d 1196, 1200 (11th Cir.1988)

(“When banks receive money for the sole purpose of de-

positing it into a customer’s account . . . the bank never

has actual control of the funds and is not a § 550 trans-

feree.”). Rather, the shareholders were the only “trans-

ferees” of the funds here. And, of course, section 546(e)

offers no protection from the trustees avoiding powers to

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App. 13

shareholders; rather, section 546(e) protects only com-

modity brokers, forward contract merchants, stockbro-

kers, financial institutions, and securities clearing agen-

cies. Accordingly, regardless of whether the payments

qualify as settlement payments, section 546(e) is not ap-

plicable since the LBO transaction did not involve a

transfer to one of the listed protected entities.® We con-

clude that the district court erred with respect to this

issue and reverse.

B. Breach of Fiduciary Duty and Related Claims

We next address Munford, Inc.’s contention that the

district court erred in granting summary judgment in

favor of the officers and directors on Munford, Inc.’s

claims of breach of fiduciary duty, negligence, misman-

agement, and waste of corporate assets.

Section 14-2-152.1(a)(1) of the Georgia Code requires

directors and officers of companies to discharge their

duties in good faith and with the care of an ordinary

prudent person. Munford, Inc. contends that the district

court erred in concluding that no disputed material facts

existed as to whether the directors and officers dis-

charged their duties in good faith and with the care of an

ordinary prudent person. Specifically, Munford, Inc.,

argues that substantial evidence supports its contention

that the directors and officers approved the LBO without

considering the economic effect of the transaction upon

the corporation in violation of section 14-2-152.1(a)(1). In

° For a discussion of this issue, see In re Healthco Int’l Inc. v.

Hicks, Muse & Co., Inc., 195 B.R. 971, 981-83 (Bankr.D.

Mass.1996).

App. 14

support of this argument, Munford, Inc. makes two as-

sertions. First, Munford, Inc. asserts that the officers

and directors disregarded Shearson’s September 1987

written report disfavoring LBO transactions.° Second,

Munford, Inc. asserts that officers and directors disre-

garded Deutschman’s reasons for refusing to proceed

with its planned purchase of Munford, Inc.

In addition, Munford, Inc. argues that Article 9 of

its Articles of Incorporation creates a private right of

action on behalf of creditors independent of section

14-2-152.1(a)(1). Munford, Inc. notes that Article 9 re-

quires the directors and officers to give due consideration

to “‘the extent to which the assets of the corporation will

be used’ for financing and ‘the social, legal, and economic

effects of the transaction on the employees, customers,

and other constituents of the corporation.’” Based on this

language, Munford, Inc. asserts that directors and offi-

cers have a higher duty of care than imposed under state

law.

The directors and officers contend that they discharged

their duties in good faith and with the care of an ordi-

nary prudent person. The directors and officers also

argue that they made an informed judgment when they

decided to accept Panfida’s LBO proposal. They stress

that they hired Shearson to perform a financial assess-

ment of Munford, Inc., consulted attorneys regarding

their duties to the company, including their duties under

the Articles of Incorporation throughout their decision-

6 In that report, Shearson opined that Munford, Inc. needed

all of its internally generated cash flow to fund growth and

could not be able to finance increased leverage resulting from

financial restructuring.

iceman

App. 15

making process, and that at all times during their ser-

vice to Munford, Inc., the company was solvent. They

therefore argue that in deciding whether to sell Munford,

Inc. they had an unqualified duty to maximize share-

holder value. With respect to Munford, Inc.’s post-LBO

financial stability, the directors and officers argue that

Citicorp’s decision to finance the LBO merger and AAC’s

warranty—that post-LBO Munford, Inc. would remain

solvent, have a reasonable amount of working capital,

and have ability to pay its debt—led them to believe that

Munford, Inc. could carry the heavy load associated with

a leveraged transaction. Finally, the directors and offi-

cers contend that Article 9 did not establish a fiduciary

duty greater than under state law or create a private

right of action on behalf of creditors. Although Article 9

provides that directors give due consideration to social,

legal, and economic effects of a transaction on employees,

customers, and other constituents of the corporation, the

directors and officers argue that this provision does not

identify creditors as persons to whom due consideration

is owed. The directors and officers therefore argue that

a constituency’s interest is only relevant when the con-

sideration of the constituency also benefits the share-

holders.

In determining whether directors and officers have

satisfied their statutory duty, Georgia courts apply the

business judgment rule. See Millsap v. American Family

Corp., 208 Ga.App. 230, 430 S.E.2d 385, 388 (1993). The

business judgment rule protects directors and officers

from liability when they make good faith business de-

cisions in an informed and deliberate manner. Cottle v.

Storer Communication, Inc., 849 F.2d 570, 575 (11th Cir.

1988). In this case, the record is replete with evidence

App. 16

that the directors and officers consulted legal and finan-

cial experts throughout the solicitation and negotiation

for a purchaser for Munford, Inc. Applying the business

judgment rule, we conclude that the directors and offi-

cers satisfied their duties under section 14-2-152.1(a)(1).

Because Munford, Inc. has failed to present any binding

legal authority to support its contention that Article 9

creates a cause of action independent of Georgia law, we

reject this argument. Accordingly, we affirm the district

court’s grant of summary judgment on this issue.

C. Severance Contracts

The district court also granted summary judgment in

favor of the officers and directors on Munford, Inc.’s

fraudulent conveyance claims. In its complaint, Munford,

Inc. alleged that the severance payments it made to

Dillard Munford, Fellows and Carroll lacked consider-

ation, and therefore constituted fraudulent conveyances

under Georgia law.” In order for Munford, Inc. to estab-

lish a fraudulent conveyance claim under Georgia law, it

must show: (1) a conveyance of property; (2) valuable

consideration; and (3) that it was insolvent at the time

7 Section 18-2-22 of the Georgia Code provides:

The following acts by debtors shall be fraudulent in law

against creditors and others and as to them shall be null

and void .. . every voluntary deed or conveyance not for

a valuable consideration made by a debtor who is insol-

vent at the time of the conveyance.

Brown v. Citizens & Southern National Bank, 253 Ga. 119,

317 S.E.2d 180, 183 (1984) (quoting O.C.G.A. § 18-2-22(3))

(emphasis added).

App. 17

of the conveyance or that the conveyance rendered it

insolvent. Brown, 317 S.E.2d at 183.

The district court entered summary judgment finding

that valuable consideration in the form of the officers’

promises to continue employment through the closing of

the sale of Munford, Inc. supported the severance pay-

ments. Munford, Inc. contends that the district court

erred in concluding that Munford, Inc. received valuable

consideration in exchange for the severance contracts.

Munford, Inc. argues that Dillard Munford’s testimony

refutes the finding that Dillard Munford’s promise con-

stituted valuable consideration because he stated in his

deposition testimony that he would have remained with

the company through closing in spite of his severance

contract. Based on this admission, Munford, Inc. asserts

that all of the severance payments constituted gifts re-

warding these officers for past services for which they

had already been paid.

Dillard Munford, Fellows, and Carroll respond to

Munford, Inc.’s arguments asserting that their existing

severance contracts each arose due to preexisting sev-

erance contracts executed in 1979 or earlier. They also

argue that their continued services to the company—

beginning with Munford, Inc.’s search in 1987 for a

single purchaser for its outstanding stock and ending in

1988 when Munford, Inc. closed the LBO transaction

with the Panfida Group—provided sufficient consider-

ation for the severance payments. Specifically, they

argue that they provided general corporate management

services, advice, strategy, and guidance to Munford, Inc.

during the relevant period.

App. 18

We conclude that Munford, Inc.’s argument lacks

merit. Georgia courts hold that “valuable consideration

is founded on money or something convertible into

money, or having value in money.” Stokes v. McRae, 247

Ga. 658, 278 S.E.2d 393, 394 (1981). Georgia case law

also clearly states that, “[clontinued performance under

a terminable at-will contract furnishes sufficient consid-

eration for the promise of additional severance pay.”

Royal Crown Companies, Inc. v. McMahon, 183 Ga.App.

543, 359 S.E.2d 379, 381 (1987). We note that this rule

of law leads to a just result in this case. If Munford, Inc.

had not entered into the severance payment contract and

these officers left Munford, Inc. prior to the closing of the

LBO, Munford, Inc.’s efforts to sell its stock to a single

purchaser probably would have been frustrated. Also,

Munford, Inc. would have been without recourse against

these officers because Munford, Inc. employed these offi-

cers as employees at-will. The severance contracts giving

rise to the severance payments, however, provided Mun-

ford, Inc. with the assurance that the officers would not

leave without providing Munford, Inc. recourse in the

event their leaving frustrated its plans to sell its stock to

a single purchaser. We therefore find that this assurance

constituted valuable consideration. Accordingly, we af-

firm the district court’s grant of summary judgment on

this claim.

D. The “Aiding and Abetting” Claim

The last issue we address is whether the district court

erred in concluding that Munford, Inc.’s claim of aiding

and abetting a breach of fiduciary duty against Shearson

failed as a matter of law. Munford, Inc. urges this court

App. 19

to recognize a cause of action for aiding and abetting a

breach of fiduciary duty under Georgia state law, argu-

ing that Georgia courts would recognize the tort of aiding

and abetting a breach of fiduciary duty. Such an action,

Munford, Inc. contends, would require a showing of (1) a

fiduciary duty on the part of the primary wrongdoer, (2)

a breach of fiduciary duty, (3) the knowledge of the

breach by the alleged aider and abettor, and (4) the aider

and abettor’s substantial assistance or encouragement of

the wrongdoing. Munford, Inc. argues that it has satis-

fied this showing. Specifically, Munford, Inc. alleges that

Shearson aided and abetted the directors’ and officers’

breach of fiduciary duty when it provided a fairness

opinion concerning the Panfida Group’s offering price

enabling the LBO transaction to go forward. It also

asserts that Shearson, based upon its 1987 report, knew

that LBO was not financially prudent for Munford, Inc.

and knew that Munford, Inc.’s financial condition con-

tinued to deteriorate. In support of its argument that

this court should recognize an aiding and abetting action,

Munford, Inc. notes that Georgia courts have acknowl-

edged an aiding and abetting cause of action in torts

involving violence, the sale of unregistered securities,

breaches of covenants with employment contracts, and

fraudulent conveyances. In response, Shearson argues

that the district court correctly held that the “imposition

of aider and abettor liability for breaches of fiduciary

duty essentially extends fiduciary obligations beyond the

scope of the confidential or special relationship” on which

the directors’ and officers’ obligations are based.

In the absence of state law, we are “obliged to resolve

the issue of law as the Georgia state court would.”

Imperial Enterprises, Inc. v. Fireman’s Fund Ins. Co.,

App. 20

535 F.2d 287, 290 (5th Cir.1976). In this case, we decline

to extend aider and abettor liability to breaches of fidu-

ciary duty concluding that Georgia courts would not

recognize such a cause of action. To hold otherwise, as

the district court found, would enlarge the fiduciary

obligations beyond the scope of a confidential or special

relationship. It is important to note that in this case

Munford, Inc. does not claim that Shearson failed to fully

advise Munford, Inc. of the potential risk of the LBO.

The board, after considering the risk Shearson identified,

decided to proceed with the LBO despite Shearson’s

initial caution to them. Moreover, the board directed

Shearson to conduct a fairness report with respect to

Panfida’s offer. Shearson issued this report as directed.

Munford, Inc. now seeks to hold Shearson liable for

performing its task competently and with full disclosure.

Even assuming that Georgia courts will someday recog-

nize a cause of action for aider and abettor liability in

the context of a breach of fiduciary duty claim, the facts

in this case do not warrant its creation now.

CONCLUSION

For the foregoing reasons, we reverse the district

court’s grant of summary judgment in favor of the share-

holders on Munford, Inc.’s fraudulent conveyance claim.

We affirm summary judgment on the remaining claims.

AFFIRMED in part; REVERSED in part; and RE-

MANDED for further proceedings.

App. 21

HATCHETT, Chief Judge, concurring in part and dis-

senting in part.

I agree with the majority opinion insofar as it con-

cludes that the district court did not err in granting the

directors, officers and Shearson summary judgment. I do

not agree, however, with the majority’s holding that the

district court erred in granting the shareholders sum-

mary judgment.

Section 546(e) precludes the trustee in bankruptcy

from avoiding settlement payments made by or to a

financial institution, commodity broker, forward contract

merchant, stockbroker, or securities clearing agency un-

less the debtor company made such payments with the

“actual intent to hinder, delay or defraud” creditors. 11

U.S.C. § 548(a)(1); see also 11 U.S.C. § 546(e). In this

case, Munford, Inc. deposited funds to purchase its out-

standing stock with Citizens & Southern Trust Com-

pany, a financial institution. Citizens & Southern Trust

Company then made settlement payments to the share-

holders for their stock. Munford, Inc., acting as trustee,

filed this action seeking to avoid the payments Citizens

& Southern Trust Company made to the shareholders.

The district court granted summary judgment in favor of

the shareholders concluding that section 546(e) barred

the avoidance of settlement payments “made by” a finan-

cial institution.

In reversing the grant of summary judgment, the

majority holds that whether the LBO payments qualify

as settlement payments under section 546(e) is not dis-

positive on the issue of whether a trustee in bankruptcy

can avoid such transfers under state law. Instead, the

majority concludes that the dispositive issue is whether

App. 22

the financial institution acquired a beneficial interest in

the settlement payments. I believe the majority, rather

than require Munford, Inc. to prove “actual intent to

hinder, delay or defraud” its creditors, chose to disregard

the plain language of section 546(e) in order to create a

new exception to its application. Because I believe that

LBO payments made to shareholders constitute settle-

ment payments for purposes of section 546(e) and that

section 546(e) only permits a trustee in bankruptcy to

avoid settlement payments made to shareholders by a

financial institution when such payments are made with

the actual intent to hinder, delay or defraud creditors, I

respectfully dissent.

en

App. 23

[Filed August 10, 1994]

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

MUNFORD, INC.

Plaintiff

CASE NO.

1:94-cv-348-GET

¥.

DILLARD MUNFORD; RUSSELL G.

FELLOWS; WINTON M. BLOUNT: ADVERSARY

HERBERT J. DICKSON; JAMES L. PROCEEDING

FERGUSON; ROBERT M. GARDINER: 91-6417

PEARSON; S. B. RYMER, JR.;

JAMES M. CARROLL; JOSEPH W.

HARDIN; JAY E. RUBEL; STATE

STREET BANK & TRUST COMPANY:

PROVIDENT NATIONAL BANK:

DFA INVESTMENT DIMENSIONS

GROUP, INC.; SHEARSON LEHMAN

)

)

)

)

)

)

RICHARD K. LEBLOND; ANDRALL E._ )

)

)

)

)

)

)

)

BROTHERS, INC. )

)

Defendants.

ORDER

The above-styled matter is presently before the court

for de novo review pursuant to Rule 9033, 11 U.S.C., of

proposed findings of fact and conclusions of law of the

bankruptcy court [bankr. docket no. 61 1] recommending

that the summary judgment motions of the following

defendants be denied: Dillard Munford {bankr. docket no.

505]; Fellows and Carroll [bankr. docket no. 508]; Hardin

and Rubel [bankr. docket no. 510]; Gardiner, LeBlond,

Dickson, Blount, Rymer, Pearson, Ferguson [bankr.

docket no. 482]; DFA Investment Dimensions Group,

Inc., State Street Bank & Trust Co., and Provident

National Bank [bankr. docket no. 422). The parties filed

App. 24

objections to the bankruptcy court’s findings of fact and

conclusions of law as follows: objections of Dillard Mun-

ford [docket no. 20]; objections of DFA entities [docket

nos. 17, 18, 19]; objections of Munford Inc. [bankr. docket

no. 626]; objections of Gardiner, LeBlond, Dickson,

Blount, Rymer, Pearson, Ferguson [bankr. docket no.

627]; objections of Fellows, Carroll, Hardin, Rubel

[bankr. docket no. 629).

Introduction

This adversary proceeding arises out of the bankruptcy

of plaintiff Munford, Inc. (plaintiff or Munford), In Re:

Munford, Inc., A90-78-SWC. Munford seeks to recover

against its former officers (Dillard Munford, Chief Ex-

ecutive Officer; Fellows, President and Chief Operating

Officer; Carroll, Vice-President and Secretary; Hardin,

Vice-President and Treasurer; and Rubel, Vice-President

and Administrative officer) and directors (Dillard Mun-

ford, Fellows, Gardiner, LeBlond, Dickson, Blount,

Rymer, Pearson, and Ferguson) for their alleged role in

approving and carrying out the purchase of Munford by

an investment group organized by Philip Handy, a non-

party. Dillard Munford and Fellows were both officers

and directors. Munford also seeks to avoid payments

made pursuant to the purchase of Munford to former

Munford shareholders DFA Investment Dimensions

Group, Inc., DFA Group Trust, and DFA Participating

Group Trust (collectively referred to herein as the DFA

entities). Provident National Bank is a defendant as

trustee of the DFA Group Trust; State Street Bank &

Trust Co. is a defendant as trustee of the DFA Partici-

pating Group Trust. Lastly, the plaintiff attempts to void

App. 25

severance payments made by Munford to former officers

Dillard Munford, Fellows and Carroll. The above defen-

dants have filed motions for summary judgment in this

adversary proceeding upon which the bankruptcy court

has issued proposed findings of fact and conclusions of

law. The bankruptcy court recommends that the defen-

dants’ summary judgment motions be denied.

Standard of Review

The bankruptcy court issued its findings of fact and

conclusions of law in this matter pursuant to 28 U.S.C.

§ 157(c)(1). Although one or more parties to this litiga-

tion filed appeals to this court of the bankruptcy court’s

findings of fact and conclusions of law, the parties are

now in agreement and have represented to the court that

this matter is appropriately before the court for review

under Bankr. Rule 9033, 11 U.S.C. Under that rule, the

“district court shall make a de novo review upon the

record or, after additional evidence, of any portion of the

bankruptcy judge’s findings of fact or conclusions of law

to which specific written objection has been made.” Rule

9033(d), 11 U.S.C. Accordingly, this court’s review of the

bankruptcy court’s opinion is de novo.

Background

Pursuant to the above standard of review and the

standard for evaluating summary judgment motions set

forth below, the court finds the following facts for the

purposes of this order only.

Prior to November 29, 1988, plaintiff Munford was a

publicly held Georgia corporation operating three pri-

App. 26

mary businesses: (1) Majik Market convenience stores,

(2) World Bazaar retail stores, and (3) LeeWards Cre-

ative Crafts retail stores. Munford also held an interest

in United Refrigerated Services, Inc. Munford’s principal

business was its chain of Majik Market convenience

stores.

Prior to November 29, 1988, the following individuals

and entities were holders of Munford stock: officers

Dillard Munford, Fellows, Carroll, Hardin and Rubel;

outside directors Gardiner, LeBlond, Dickson and Rymer;

and the DFA entities. The DFA entities, which are

mutual funds and unit trusts, were beneficial sharehold-

ers of 234,158 shares of Munford stock as of November

29, 1988.

In August of 1987, Munford’s directors retained Shear-

son Lehman Brothers, Inc. to evaluate the company’s

future. After conducting a financial review and analysis

of Munford, Shearson recommended that a sale of 100%

of Munford’s commons stock would maximize shareholder

value. Also based on its analysis, Shearson further con-

cluded that a leveraged buy-out or leveraged recapi-

talization would not sutcessfully maximize shareholder

value. After reviewing Shearson’s report, Munford’s di-

rectors authorized Shearson to prepare an offering

memorandum and to solicit potential purchasers of Mun-

ford. Shearson’s efforts to find a purchaser for Munford

were not successful.

Thereafter, in early 1988, Philip Handy organized a

group of investors (hereafter collectively referred to as

“the purchasers” or the “new investors”) to make a bid to

purchase Munford through a leveraged buy-out (LBO).

Munford’s directors first considered the new investors’

App. 27

proposal at the directors meeting on May 23, 1988. At

this meeting, Munford’s counsel advised the directors of

the proposal and of various factors to be considered when

evaluating the new investors’ offer. The directors unani-

mously approved of the proposed purchase of all of

Munford’s outstanding shares at a price of $18.50 per

share and began pursuing a definitive agreement.

At the June 1, 1988 meeting of Munford’s directors,

Handy presented his plan for financing the LBO. Handy

indicated that the purchase would be highly leveraged

with as little equity participation by the new investors as

possible. To accomplish the LBO, the new investors

formed Alabama Acquisition Corporation (AAC) and

Alabama Merger Corporation (AMC). AMC was a wholly

owned subsidiary of AAC. Under the plan, AMC would

merge with Munford, leaving Munford as the surviving

entity.

On August 9, 1988, Munford’s directors formally ap-

proved the amended merger agreement which reduced

the sale price of Munford stock to $17.00 per share. At

this meeting, Shearson presented a fairness opinion

indicating that such a price was fair to Munford’s share-

holders. The merger agreement called for AAC and AMC

to deposit or cause to be deposited into a trust account

with an exchange agent sufficient cash to purchase Mun-

ford’s outstanding shares of common stock for $17.00 per

share. The agreement called for the exchange agent, Citi-

zens & Southern Trust Co. (C & § Trust), to be given

irrevocable authority to make cash payments to share-

holders as called for in the agreement.

On November 29, 1988, the LBO was consummated.

AAC contributed $550,000 and 291,177 shares of Mun-

App. 28

ford stock to AMC; AMC and Munford then merged, with

Munford remaining as the surviving entity. Citicorp

Bank (Citicorp) issued a $54,800,000 line of credit to

Munford; the line of credit was secured by a first priority

lien on virtually all of Munford’s assets. On November

29, 1988, Handy, acting as chairman of Munford, drew

approximately $53,244,000 from Munford’s Citicorp line

of credit and these funds were used by Munford to com-

plete the LBO. Munford’s other liquid-assets at the time

of the LBO included approximately $16,900,000 in cash

and certificates of deposit, $21,750,000 from the sale of

Munford’s World Bazaar units, and the $550,000 cash

received from the merger with AMC. Thus, Munford’s

total liquid assets at the time of the LBO equaled ap-

proximately $92,500,000. (See depo. exhibit 378.)

The outflow of funds from Munford pursuant to

the LBO occurred as follows. Munford transferred

$61,811,235 from its Citizens & Southern National Bank

account #00168005 to C & S Trust, the exchange agent

for the share repurchases. These funds were paid by

C & S Trust to Munford’s shareholders tendering their

shares in exchange for $17 per share. All of Munford’s

3,927,240 outstanding shares were tendered except for

the 291,177 shares held by AMC and another 108 shares

(3,927,240 outstanding shares less 291,285 shares not

redeemed = 3,635,955 shares redeemed at $17/share =

$61,811,235). The 291,177 shares held by AMC were

retired by Munford without consideration. (See depo.

exhibit 378.)

The LBO also called for Munford to expend over

$25,000,000 to pay off its pre-LBO creditors. This was

done to allow Citicorp to have a first priority lien on all

Munford assets as security for the line of credit. The

App. 29

remainder of funds paid-out by Munford went to pay

various LBO fees and related payments. In one instance,

Munford paid a “fee” of $550,000 to Winter Park Capital,

an affiliate of AAC. Munford also paid approximately

$3,100,000 in other LBO fees and expenses. The total

out-flow of funds from Munford pursuant to the LBO

totaled approximately $90,600,000.

Munford filed for bankruptcy protection on J anuary 2,

1990. Munford, as debtor in possession acting with the

power of a trustee under 11 U.S.C. § 1107(a), filed its

complaint for the benefit of Munford’s estate and its

unsecured creditors on June 17, 1991; Munford’s amend-

ed and restated complaint was filed on July 23, 1992.

Munford’s complaint states five counts against the in-

stant defendants. In Count I, Munford asserts that the

payments to Munford shareholders pursuant to the LBO

constituted fraudulent conveyances under O.C.G.A.

§ 18-2-22(3); defendants in Count I are all of the named

defendants who were Munford shareholders: Dillard

Munford, Fellows, Dickson, Gardiner, LeBlond, Rymer,

Carroll, Hardin, Rubel, and the DFA entities (the share-

holder defendants). In Counts IJ and IV, Munford asserts

that its former directors and Carroll breached their

fiduciary duty to Munford and negligently mismanaged

and wasted corporate assets. In Count III, Munford

asserts that the director defendants violated Georgia’s

corporate distribution laws under O.C.G.A. § 14-2-91 &

§ 14-2-92 (1988) repealed by Ga. L 1988, p. 1070, § 1,

effective July 1, 1989. In Count V, Munford seeks to

have severance payments paid to defendants Dillard

Munford, Fellows, and Carrol] set aside as fraudulent

conveyances under O.C.G.A. § 18-2-22(3).

ee

App. 30

The defendants filed motions for summary judgment.

By opinion dated April 4, 1994 [bankr. docket no. 611),

the bankruptcy court recommended that the defendants’

motions for summary judgment be denied as to all five

counts and all defendants. The defendants filed objec-

tions to the bankruptcy judge’s recommendation as to all

five counts. The plaintiff filed an objection as to the

bankruptcy court’s interpretation of the legal standard to

apply in considering whether valuable consideration was

given under Georgia’s fraudulent conveyance statute.

This court heard oral arguments on July 26, 1994. The

court will consider the parties’ objections as they pertain

to each of the five counts pertaining to the instant de-

fendants.

Discussion

I. Summary Judgment Standard.

Bankruptcy Rule 7056 provides that “Rule 56 F.R.C.P.

applies in adversary proceedings.” Rule 7056, 11 U.S.C.

Rule 56(c), Fed. R. Civ. P., defines the standard for sum-

mary judgment: courts should grant summary judgment

when “there is no genuine issue as to any material fact

_.. and the moving party is entitled to judgment as a

matter of law.” In Celotex Corp. v. Catrett, 477 U.S. 317,

324, 106 S. Ct. 2548, 2553 (1986), the Supreme Court

interpreted Rule 56(c) to require the moving party to

“always bear the initial responsibility of informing the

district court of the basis of its motion, and identifying

those portions of ‘the pleadings, depositions, answers to

interrogatories, and admissions on file, together with

affidavits, if any’ which it believes demonstrate the

absence of a genuine issue of material fact.” Thus, the

App. 31

movant’s burden is “discharged by ‘showing’—that is,

pointing out to the district court—that there is an ab-

sence of evidence to support the nonmoving party’s case.”

Id. 477 U.S. at 325, 106 S. Ct. at 2554; see also United

, 941 F.2d 1428,

1437 (11th Cir. 1991),

Once the movant has set this burden, the burden on

summary judgment shifts to the nonmoving party who

must establish that there is a genuine material issue of

fact remaining for trial. Celotex, 477 U.S. at 325, 106

S. Ct. at 2554. The nonmoving party must go beyond the

pleadings and submit evidence in the form of affidavits,

depositions, admissions and the like, to demonstrate that

a genuine issue of material fact does exist. Id. The

Supreme Court stated in

Inc., 477 U.S. 242, 257, 106 S. Ct. 2505, 2514 (1986),

“that the plaintiff, to survive the defendant’s motion,

need only present evidence from which a jury might

return a verdict in his favor. If he does so, there is a

genuine issue of fact that requires a trial.” In making a

determination of whether there is a material issue of

fact, “[t]he evidence of the non-movant is to be believed,

and all justifiable inferences are to be drawn in his

favor.” Id. 477 U.S. at 255, 106 S. Ct. at 2513; Rollins v.

, 833 F.2d 1525, 1529 (11th Cir. 1987).

However, an issue is not genuine if it is unsupported

by evidence or if it is created by evidence that is “merely

colorable” or is “not significantly probative.” Anderson,

477 U.S. at 249-50, 106 S. Ct. at 2511. Similarly, a fact

is not material unless it is identified by the controlled

substantive law as an essential element of the non-

moving party’s case. Id. at 248. Thus, to create a genuine

issue of material fact for trial, the party opposing the

App. 32

summary judgment must come forward with specific evi-

dence of every element essential to his case with respect

to which (1) he has the burden of proof and (2) the sum-

mary judgment movant has made a plausible showing of

the absence of evidence on the necessary element. Celo-

tex, 477 U.S. at 323, 106 S. Ct. at 2552.

Il. Application of Standard.

A. Count I. The crucial aspect of the LBO transac-

tion was Munford’s repurchase of its outstanding shares

from its shareholders for $17.00 per share.

In Count I, Munford seeks to avoid under 11 U.S.C.

§ 544(b) the share repurchase payments paid to the

shareholder defendants pursuant to the LBO transaction

(approximately $10,800,000). (See plaintiff's first amend-

ed complaint [bankr. docket no. 192] at 99 2&7.) Asa

debtor in possession, Munford is entitled to utilize the

“strong arm” provision of 11 U.S.C. § 544(b) to avoid

conveyances which are avoidable under state law. In

relevant part, § 544(b) provides that a debtor in posses-

sion “may avoid any transfer of an interest of the debtor

in property . . . that is voidable under applicable law by

a creditor holding an unsecured claim.” Thus, Munford

can avoid, for the benefit of its estate, all transfers to the

shareholder defendants as long as Munford can establish

at least one actual, unpaid claim held by an unsecured

creditor prior to the time of the LBO payments to the

shareholders. See Moore v. Bay, 284 U.S. 4, 5 (1931); In

Re Dante, 1 Bankr. 547, 548 (Bankr. N.D. Ga. 1979); 4

Collier on Bankruptcy, | 544.03 (15th ed. 1989). It is

undisputed that at least one such claim existed. In short,

therefore, “[slection 544(b) of the Bankruptcy Code, the

ee

App. 33

so-called ‘strong arm’ clause, grants to the trustee in

bankruptcy the same right to avoid transfers as an

unsecured creditor under applicable state law.” In Re

Harbour, 845 F.2d 1254, 1255 (4th Cir. 1988). See also

In Re Graham, 747 F.2d 1383, 1386 (11th Cir. 1984)

(bankruptcy trustee invoking O.C.G.A. § 18-2-22 to avoid

transfer under § 544(b)).

Invoking § 544(b), Munford asserts that the LBO pay-

ments to the shareholder defendants constituted fraudu-

lent conveyances under 0.C.G.A. § 18-2-22. That section

provides that “[e]very voluntary deed or conveyance, not

for valuable consideration, made by a debtor who is in-

solvent at the time of the conveyance” is “fraudulent in

law against creditors and others and as to them shall be

null and void.” O.C.G.A. § 18-2-22(3). Thus, Munford

asserts that it did not receive valuable consideration in

exchange for its payment of $17.00 per share to all of its

outstanding shareholders. In essence, Munford contends

that it received nothing of value in exchange for the debt

it incurred in order to effectuate the LBO.

While § 544(b) authorizes a bankruptcy trustee (or

debtor in possession acting as trustee) to avoid transfers

that are avoidable under state law, that authority is

restricted by 11 U.S.C. § 546(e). That section states that

(njotwithstanding section{ ] 544... of this title,

the trustee may not avoid a transfer that is...

a settlement payment, as defined in section

101(35) or 741(8) of this title, made by or to a

commodity broker, forward contract merchant,

stockbroker, financial institution, or securities

clearing agency, that is made before the com-

mencement of the case, except under section

548(a)(1) of this title.”

OO eeeEeE—————————

a GD

App. 34

11 U.S.C. § 546(e) (emphasis supplied). Section 741(8)

defines “settlement payment” as “a preliminary settle-

ment payment, a partial settlement payment, an interim

settlement payment, a settlement payment on account,

a final settlement payment, or any other similar pay-

ment commonly used in securities trade.” 11 U.S.C.

§ 741(8). Section 546(e), therefore, precludes the avoid-

ance of “settlement payment” transfers made by or to a

stockbroker or financial institution.

As did the bankruptcy court, this court recognizes the

conflict of authority on the question of whether payments

made to shareholders pursuant to an LBO transaction

are settlement payments under § 546(e). In Kaiser Steel

i w , 913 F.2d 846 (10th

Cir. 1990) (Kaiser I), the Tenth Circuit considered the

application of § 546(e) to LBO payments made to stock-

brokers and other financial intermediaries holding

shares not as beneficial owners but merely as represen-

tatives of its clients (the actual beneficial shareholders).

The court construed the term “settlement payment”

broadly, finding its expansive construction of the term

justified by: (a) a natural reading of the statutes in-

volved, (b) the legislative intent behind § 546(e) “to pro-

tect the nation’s financial markets from the instability

caused by the reversal of settled securities transactions,”

(c) and the understanding of the term “settlement” in the

securities industry. See Id. at 848-49. Lastly, the court

concluded that, in the absence of any limiting language

in the definition of “settlement payment” in the relevant

statutes, to impose such a limitation “would be an act of

judicial legislation.” Id. at 850. Having justified its ex-

pansive reading of the term “settlement payment,” the

Kaiser I court held that LBO payments made to stock-

ee

App. 35

brokers holding shares for the beneficial owners are set-

tlement payments and are thus excluded from avoidance

under § 546(e).

In , 952 F.2d 1230 (10th Cir.

1991), cert. denied, 112 S. Ct. 3015 (1992) (Kaiser IT), the

Tenth Circuit addressed an issue that was not raised in

Kaiser I: whether LBO payments to beneficial sharehold-

ers are excluded under § 546(e). Applying the same

expansive definition of “settlement payment” used in

Kaiser I, the Kaiser II court held that the settlement

payment exemption extends to LBO payments made

directly to shareholders, even if no financial intermedi-

ary (e.g. stockbroker) is involved. Id. at 1239-40. Thus,

Kaiser II held that § 546(e) precludes recovery of LBO

payments from beneficial shareholders.

In contrast to the Tenth Circuit’s rulings in Kaiser |

and Kaiser II, the district court in Wieboldt Stores vy.

Schottenstein, 131 Bankr. 655 (N.D. Ill 1991), examined

the legislative intent behind § 546(e) and concluded that

“Congress exempted settlement payments in the com-

modities (and later the securities) industry out of concern

that the bankruptcy of one party in the clearance and

settlement chain could spread to other parties in that

chain.” Id. at 664. Based on this more narrow under-

standing of the intent behind the statute, the Wieboldt

court concluded that the purpose of § 546(e) did not

warrant applying the exemption to payments made to

beneficial shareholders. Id. at 664-65.

As did the court in Wieboldt, the bankruptcy court

found that the “clearance and settlement chain” general-

ly used in securities transactions was not implicated by

the LBO transaction. The bankruptcy court also con-

aaa

App. 36

curred in Wieboldt’s interpretation of the legislative

history of § 546(e) and the objective of the settlement

payment exemption. Accordingly, the bankruptcy court

concluded that § 546(e) does not prohibit avoidance of

payments made to shareholders. (Opinion of bankr. court

{bankr. docket no. 611], April 4, 1994, at p. 38-40.)

Having considered the record before it and the parties’

written objections and oral arguments, this court be-

lieves that the construction given to § 546(e) by the

Tenth Circuit in Kaiser I, 913 F.2d 846, and Kaiser II,

952 F.2d 1230, is the better view. The broad definition of

the term “settlement payment” advocated by the Kaiser

courts is consistent with (a) the broad definition of

“settlement payment” suggested by the statutes, (b) the

intended function of the exemption as indicated by the

general legislative history of the statute, and (c) the

understanding of the term “settlement” in the securities

industry. Accordingly, this court concludes that pay-

ments made to shareholders through a financial institu-

tion acting as a clearing or exchange agent pursuant to

a LBO are settlement payments under § 546(e).

The plaintiff argues that even if LBO payments to

shareholders are settlement payments, “each of the

Directors and Officers against whom the fraudulent

conveyance claim is brought, except Gardiner, held the

Munford shares in his own name and thus did not

receive payment through a broker or other securities

intermediary.” (P. response [bankr. docket no. 654] to

Def. objections to bankr. court opinion at p. 48.) The

court finds this argument unavailing for two reasons.

First, it is apparent that even the officers and directors

who personally tendered their Munford shares for re-

demption received payment by and through C & S Trust,

en

App. 37

a “financial institution” acting as the exchange agent for

the LBO. Indeed, the Same facts were present in Kaiser

Il, 952 F.2d at 1236 (court noting that “some financial

intermediaries and beneficial owners were required to

tender their shares directly to Bank of America” which

was the corporation’s disbursing agent). Munford has

failed to offer any grounds, nor is the court aware of any,

to support a definition of “financial institution” that is SO

narrow as to exclude C & S Trust. Second, the court is

Satisfied that applying the “settlement payment” exclu-

sion to payments made directly to shareholders “is jus-

tified by Congress’s policy interests in promoting finality

and ‘in promoting speed and certainty in resolving

complex financial transactions.’” Id. at 1240 n.10 (quot-

ing H.Rep. No. 484, 101st Cong., 2d Sess. 2 ( 1990), re-

printed in 1990 U.S.C.C.A.N. 223, 224).

In accordance with the foregoing, the court finds that

11 U.S.C. § 546(e) preciudes Munford’s action to avoid

the payments made to its shareholders pursuant to the

LBO. The shareholder defendants are therefore entitled

to summary judgment on Count I.

B. Counts II & IV. In Counts II and IV, Munford

seeks to hold the director defendants and defendant

Carroll liable for breach of fiduciary duty and negligent

mismanagement and waste of corporate assets. Specifi-

cally, Munford asserts that the defendants breached

their duties to the corporation by approving and effecting

the purchase of Munford via the LBO and by failing to

consider the interests of other corporate constituents,

namely creditors, when evaluating whether to accept the

LBO offer. The defendants assert that their only obliga-

tion when considering the LBO was to maximize share-

App. 38

holder value and that they are shielded from liability by

the business judgment rule.

In its opinion recommending the denial of the defen-

dants’ summary judgment motions, the bankruptcy court

recognized two potential sources of the defendants’ duty:

(1) the directors’ duty to consider creditors’ interests

when a corporation is insolvent and (2) the duty incurred

by the defendants specifically under Article IX of Mun-

ford’s Articles of Incorporation (Article IX). Article IX

states in relevant part as follows:

[t]he board of directors of the corporation, when

evaluating any offer of another person to make a

tender or exchange offer for the Common Stock of

the corporation, to merge or consolidate the cor-

poration with another person, or to purchase or

otherwise acquire all or substantially all of the

properties and assets of the corporation, shall, in

determining what is in the best interests of the

corporation and its stockholders, given due con-

sideration to all relevant factors, including with-

out limitation . . . the social, legal and economic

effects of the transaction on the employees, cus-

tomers and other constituents of the corporation

and its subsidiaries.

(Depo. exhibit 481.) The bankruptcy court denied the de-

fendants’ motion for summary judgment on these claims

based on its conclusion that “the evidence establishes a

question of fact as to whether the officer and director

defendants considered all of the factors listed in Article

IX.” The bankruptcy court found that “[a] jury consider-

ing this evidence could find that the officer and director

defendants either abused their discretion or acted in bad

faith in violation of Article IX and the business judgment

App. 39

rule.” (Opinion of bankr. court [bankr. docket no. 611],

April 4, 1994, at p. 50.)

In regard to directors’ duty to creditors that arises

pursuant to the insolvency of a corporation, the parties

do not dispute that Munford was solvent prior to the

LBO. The plaintiff asserts, however, that “[w]here a rea-

sonably informed and engaged board of directors should

have known that the transaction it was considering

threatened the corporation’s solvency, the directors’ fidu-

ciary obligation to the corporation requires the directors

appropriately to address and evaluate the transaction’s

effect.” (P. response [bankr. docket no. 654] to Def. ob-

jections to bankr. court opinion at p.54 (emphasis in

original).) Whether Munford asserts that the directors

owed a duty to the corporation and its constituents in-

dependent of Article IX is unclear. Regardless, however,

of the source of the obligation, the essence of the plain-

tiffs claims is that the defendants were duty-bound to

consider the impact that the proposed LBO would have

on not just the shareholders but also upon the corporate

entity itself and the corporation’s constituents, including

creditors.

While it is apparent that Article IX imposed an ob-

ligation upon the defendants, no one disputes that the

directors clearly owed a duty to Munford’s shareholders

to maximize their return. To the extent that concerns

about the transaction’s impact on Munford’s future finan-

cial condition were adverse to the present interests of the

shareholders to receive top-dollar for their shares, the

defendants were required to balance the competing

interests. In striking that balance in favor of accepting

the new purchasers’ LBO proposal, the defendants are

protected from liability by the business judgment rule.

aaa rege re neeeensccnseemeercer canal

App. 40

“Under the business judgment rule[,] directors are pre-

sumed to have acted properly and in good faith{ ] and

are called to account for their actions only when they are

shown to have engaged in fraud, bad faith or an abuse of

discretion.” Cottle v. Storer Communication, Inc., 849

F.2d 570, 574 (11th Cir. 1988). “In the corporate take-

over context, the business judgment rule applies once the

directors have satisfied their duty to act in an informed

and deliberate manner in determining whether to ap-

prove an agreement of merger ... .” Id. at 575 (internal

quotes omitted). Under former O.C.G.A. § 14-2-152.1

(1982), repealed by Ga. L. 1988, P. 1070, § 1 effective

July 1, 1989, a director discharging his duties must act

“fiJn good faith” and “(with the care an ordinarily

prudent person in a like position would exercise under

similar circumstances.” O.C.G.A. § 14-2-152.1(a)(1)

(Michie Supp. 1988). Further, a director “is entitled to

rely on information, opinions, reports, or statements,

including financial statements and other financial data,

if prepared or presented by: . . . [l]egal counsel, public

accountants, investment bankers, or other persons as to

matters the director reasonably believes are within the

person’s professional or expert competence.” O.C.G.A.

§ 14-2-152.1(a)(2) (Michie Supp. 1988).

The undisputed factual record of this case makes

apparent that the directors took every reasonable step

that could be expected to evaluate the proposed LBO

transaction. The record is replete with evidence that the

defendants consulted with legal and investment banking

experts, apprised themselves of the intricacies of the pro-

posed transaction and about the background and repu-

tation of the new purchases and new manager, and

applied their own expertise and experience when evalu-

ating the transaction.

App. 41

Representatives from both King & Spalding, Munford’s

legal counsel, and Shearson Lehman Brothers, Munford’s

investment counsel, attended the directors’ meetings on

May 23, 1988, when the new purchasers’ proposal was

first announced (depo. exhibit 16 - minutes of directors’

meeting 5/23/88), as well as subsequent meetings to

consider the transaction on June 1, 1988 (depo. exhibit

17 - minutes of directors’ meeting 6/1/88), June 7, 1988

(depo. exhibit 18 - minutes of directors’ meeting 6/7/88)

and August 9, 1988 (depo. exhibit 28 - minutes of

directors’ meeting 8/9/88). The minutes of the May 23,

1988 directors’ meeting indicate that legal counsel dis-

cussed with the directors the requirements of Article IX

of Munford’s articles of incorporation. (Depo. exhibit 16

at p. 2.) (See also Rubright depo. at pp. 19-20, 138-41,

referencing prior detailed examination of Article IX

requirements with directors.) At that same meeting,

counsel also informed the directors of all the terms of the

tentative agreement that had been reached between

Munford and the new purchasers. (Id.) Further, a repre-

sentative of Shearson also addressed the directors re-

garding financing of the proposed transaction. Shearson

noted to the directors on May 23, 1988 that the new pur-

chasers were backed by an investment corporation with

over $60,000,000 in assets and that Shearson was “favor-

ably impressed with the apparent access to capital of

[the new purchasers’) affiliates in other recent trans-

actions ... . The Directors then discussed further the

background and financial capacity of F. Philip Handy

and [his investment group].” (Id. at pp. 3-4.) The minutes

of the June 7, 1988 directors’ meeting indicate that

Munford’s legal counsel, after discussing the new pur-

chasers’ financing plan for the proposed purchase, ad-

App. 42

vised the directors that they “could achieve certain com-

fort on post closing solvency of Munford Inc. in the event

a reputable lender, such as Citibank, is willing to finance

the transaction.” (Depo. exhibit 18 at p.2.) The undis-

puted record also reflects that Munford’s legal counsel

informed the directors that Citicorp would perform and

require a solvency analysis of post-acquisition Munford -

prior to financing the LBO. (Hopkins depo. at pp. 199,

210.) Lastly, Munford’s attorneys secured from the new

purchasers prior to closing the LBO a covenant that

Munford would remain a solvent entity after the pur-

chase. (See Rubright depo. at pp. 30-31.)

The record also plainly and repeatedly indicates that

the directors relied on the presence of Citicorp as lender.

The directors were obviously aware that Citicorp, as the

primary lender for the new purchasers, would have

access to the business plans and strategy that the new

owners and managers of Munford planned to implement

after the LBO. The director defendants uniformly cited

Citicorp’s involvement as an important indication that

Munford would be able to make payment on its loans

and remain solvent after the transaction. (See Pearson

depo. at pp. 90-100; Ferguson depo. at p. 97; Gardiner

depo. at p. 84; Rymer depo. at p. 118-119.)

There is also significant evidence that the directors

evaluated not only the financial terms of the proposed

transaction but also the new purchasers and the pro-

posed new management team. As cited above, Shearson

provided its opinion during the May 23, 1988 directors’

meeting that the new purchasers had access to large

amounts of capital from their affiliated companies. The

minutes of that meeting also indicate that the directors

themselves discussed Handy’s background and the finan-

ee

App. 43

cial resources of the new purchasers. (Depo. exhibit 16 at

p. 4.) The record also reflects that at the June 1, 1988

meeting Handy was personally questioned by the direc-

tors about the financing for the purchase. (Depo. exhibit

17 at p. 3.) The directors were also informed and evalu-

ated the individual selected by the new purchasers to

manage Munford after the transaction. By letter dated

September 26, 1988 and addressed to all directors,

Dillard Munford introduced Joe Leonardo as the pur-

chasers’ choice to run Munford’s convenience store busi-

ness after the purchase. The letter highlighted Leonar-

do’s credentials including his responsibility for turning

around another convenience store chain that had previ-

ously lost money. (Depo. exhibit 29.) Both directors

Pearson and Gardiner considered Handy’s sophistication

and Leonardo’s prior success in the business as indica-

tions that Munford would survive the transaction. (See

Pearson depo. at 84-87, 100; Gardiner depo. at p. 114.)

Lastly, the record is replete with evidence indicating

that the directors evaluated the transaction with the

benefit of their own experience and information. Pearson,

who was not a Munford stockholder, express] y considered

the impact of the transaction on Munford’s post-acquisi-

tion solvency. He felt strongly that Munford was in need

of new management and that Munford could and would

remain solvent if this was done. (Pearson depo. at pp. 65,

84.) Ferguson, also not a shareholder, expressly stated

that he evaluated the proposed transaction by consider-

ing both the effect on the corporation as an entity and

the individual shareholders. (See Ferguson depo. at pp.

31, 38-39.) Rymer acknowledged his obligation to consid-

er a variety of factors when evaluating the transaction

and indicated that he had no concern about Munford’s

App. 44

post-closing solvency. (Rymer depo. at pp. 120, 146-47.)

Gardiner, too, stated that he had no reason to doubt the

continued operation of Munford after the sale. (Gardiner

depo. at p. 46.)

Based on the undisputed factual record summarized

above, the court finds as a matter of law that the de-

fendants fulfilled their obligation to consider all aspects

of the proposed transaction. Indeed, the court is satisfied

that the defendants took every reasonable step that they

could have been expected to take in considering the LBO.

Furthermore, the record is completely devoid of any in-

dication that the defendants engaged in fraud, bad faith

or an abuse of discretion. While the plaintiff urges that

the defendants could or even should have decided against

going forward with the LBO, the defendants exercise of

business judgment cannot be evaluated in hindsight. The

court finds as a matter of law, therefore, that the de-

fendants did not breach any fiduciary duty and that they

did not act negligently in evaluating the proposed LBO.

Accordingly, the defendants are entitled to summary

judgment as to the plaintiff's claims in Counts II and IV.

In the alternative to the court’s analysis above, the

court also finds that the plaintiff has failed to state a

cause of action for the defendants’ alleged violation of

Article IX. The plaintiff has failed to bring to the court’s

attention, nor is the court independently aware of, any

legal authority directly supporting the contention that a

cause of action exists against the defendants for alleged-

ly breaching their responsibility imposed under Article

IX. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946

(Del. 1985), relied upon by the plaintiff, does not even

purport to create such a cause of action. Accordingly, the

court finds that even if the defendants failed to comply

App. 45

with their obligations under Article IX, such does not

give rise to a private cause of action.

C. Count III. Munford asserts in Count III that the

director defendants are liable for violating Georgia’s

corporate distribution laws. 0.C.G.A. § 14-2-9] (1988),

repealed by Ga. L 1988, p. 1070, § 1, effective July 1,

1989, prohibits the distribution to shareholders of a

corporation’s assets “at a time when the corporation is

insolvent or when such distribution would render the

corporation insolvent.” Similarly, 0.C.G.A. § 14-2-992

(1988), repealed by Ga. L 1988, p. 1070, § 1, effective

July 1, 1989, prohibits a corporation from repurchasing

its own shares at a time when the corporation is insol-

vent or would be rendered insolvent by the repurchase.

The bankruptcy court denied the defendants’ motion for

summary judgment on the grounds that issues of fact

existed as to the nature of the LBO transaction. Specifi-

cally, the bankruptcy court found that “a jury could

conclude that [the LBO] was a distribution or share

repurchase transaction.” (Opinion, [bankr. docket no.

611], April 4, 1994 at p. 53.)

The defendants urge this court to follow C-T of Vir-

ini _Vv » 958 F.2d 606 (4th Cir. 1992), in

which the Fourth Circuit rejected a plaintiffs attempt to

apply Virginia’s corporate distribution statute to recap-

ture payments made to shareholders pursuant to an

LBO structured similarly to the one at issue. In short,

the court premised its decision on its conclusion that “[a]

corporate acquisition, structured as a merger, is simply

a different animal from a distribution.” Id. at 611. The

bankruptcy court rejected the reasoning of C- ir-

ginia, stating that “the distribution and share repurchase

Statutes of the Georgia Code clearly were intended to

noni

App. 46

protect creditors by prohibiting transfers at a time when

a corporation is insolvent or would be rendered insolvent.

Such intent furthers the longstanding principal that

creditors are to be paid before shareholders.” (Opinion

{bankr. docket no. 611], April 4, 1994, at p. 53.)

At this juncture of the litigation, this court agrees with

the bankruptcy court and declines to follow the Fourth

Circuit’s decision in C-T of Virginia. Whether or not

Georgia’s corporate distribution laws were violated

causing Munford’s bankruptcy is an issue of fact and is

not susceptible to summary adjudication. Accordingly,

the director defendants’ motion for summary judgment

is not warranted as to Count III.

D. Count V. Munford asserts in Count V that sever-

ance payments made to defendants Dillard Munford,

Fellows and Carroll are void as fraudulent conveyances

under O.C.G.A. § 18-2-22(3). That section provides that

“[e]very voluntary deed or conveyance, not for valuable

consideration, made by a debtor who is insolvent at the

time of the conveyance” is “fraudulent in law against

creditors and others and as to them shall be null and

void.” O.C.G.A. § 18-2-22(3). Defendants Dillard Mun-

ford, Fellows and Carroll assert that the severance pay-

ments made to them subsequent to the LBO were in con-

sideration for their continued employment as officers of

Munford up to the time of the LBO.

In order to recover on this claim, Munford must estab-

lish three elements: (1) the conveyance of its property

(the severance payments) to the defendants, (2) that the

conveyances were “voluntary,” i.e. not for valuable con-

sideration, and (3) that Munford was insolvent at the

time of the payments or was rendered insolvent thereby.

App. 47

See Brown v. Citizens & Southern National Bank. 253

Ga. 119, 122, 317 S.E.2d 180 (1984). Georgia courts have

long and uniformly held that the term “voluntary” as

used in the fraudulent conveyance statute is not used in

its ordinary meaning of “free choice” as opposed to “com-

pelled”; rather, “a voluntary conveyance or deed is one

without any valuable consideration.” Id. “[Vjaluable

consideration is founded on money or something convert-

ible into money, or having value in money.” Stokes v.

McRae, 247 Ga. 658, 659, 278 S.E.2d 393 (1981).

It is apparent that the instant defendants received a

transfer of money from the plaintiff thus Satisfying the

first element of the claim. Further, the parties do not

dispute the existence of a factual dispute as to the third

element of the instant claim—whether Munford was in-

solvent at the time it was obligated to make the Pay-

ments or was rendered insolvent thereby. Accordingly,

the merit of the defendants’ motion as to this claim turns

on whether the severance payments they received were

supported by valuable consideration. In denying the

defendants’ summary judgment motion, the bankruptcy

court found that Munford had come forward with suffi-

cient evidence to Support a jury determination that the

payments to the defendants were merely “gifts” given in

appreciation for past efforts and not supported by valu-

able consideration.

The defendants assert that they are entitled to sum-

mary judgment because Munford received valuable con-

sideration in return for the severance payments as a

matter of law. Specifically, the defendants contend that

Munford received valuable consideration in the form of

continued employment by the defendants during 1987,

when Munford was pursuing bidders to purchase 100%

App. 48

of its outstanding stock, and 1988, when Munford was

negotiating the LBO. This circuit has recognized that a

corporation receives a “bona fide” benefit from a “golden

parachute” provision that serves to eliminate the threat

that an officer will depart the company due to an immi-

nent or likely sale or takeover of the corporation. See

International Ins. Co. v. Johns, 874 F.2d 1447, 1462-67

(11th Cir. 1989). Furthermore, Georgia law has expressly

recognized that “[clontinued performance under a ter-

minable-at-will contract furnishes sufficient consider-

ation for the promise of additional severance pay.” Royal

Crown Cos. v. McMahon, 183 Ga. App. 543, 545, 359

S.E.2d 379 (1987). In accordance with this authority, if

such continued performance was provided to Munford by

the defendants as consideration for the severance pay-

ments at issue, the defendants are entitled to summary

judgment.

The plaintiff asserts, however, that there is evidence

indicating that the defendants did not promise continued

employment in exchange for the severance provisions.

Having considered the evidence cited by both the bank-

ruptcy court and the plaintiff, the court finds that it is

not sufficient to raise a genuine issue of fact as to this

claim. Section 9 of the defendants’ original employment

contracts with Munford, under which the severance

terms at issue arose, provided for severance payments to

the employee upon the termination of the employment

contract by Munford’s directors (or with the directors’

approval). Dillard Munford and Fellows’s original em-

ployment contracts were dated January 11, 1979; Car-

roll’s original employment contract was dated September

21, 1987. As the purchase of Munford in the LBO grew

increasingly more likely, the directors approved (see

App. 49

depo. exhibit 18 at Pp. 6-7) and Munford and the defen-

dants agreed to amend the terms of Section 9 of the

original employment contract to State that the contract

of employment was terminable by either party upon the

consummation of the LBO transaction with the new pur-

chasers. Upon such termination, the severance payments

would be payable substantially as called for under the

original contract. These amendments were entered into

in June and again in August of 1988, several months

prior to the consummation of the LBO on N ovember 29,

1988.

The court finds as a matter of law that the severance

payments provided for in the defendants’ employment

contracts were given in exchange for valuable consider-

ation—such being the defendant’s continued employ-

ment. The original employment contracts clearly pro-

vided that the severance payments would only be paid in

months prior to the consummation of the LBO, the

contracts permitted either the employee or Munford to

terminate the contract with full severance benefits, but

only after the consummation of the LBO. In essence,

the defendants could only obtain the severance benefits

by continuing to work for Munford up to the time of the

LBO transaction. The employment contract terms make

it clear that the severance benefits paid to the defen-

dants were conditioned on their continued employment.

Such terms are logically and as a matter of law

inconsistent with the plaintiff's contention that the

severance payments were gifts to the defendants. The

evidence offered by the plaintiff in support of its conten-

tion that the severance payments were mere gifts is

App. 50

contrary to the plain terms and meaning of the defen-

dants’ employment contracts and is insufficient to raise

a genuine issue of fact on this issue. Accordingly, the

defendants are entitled to summary judgment as to

Count V.

Summary

The motion for summary judgment by the DFA entities

{bankr. docket no. 422] is GRANTED. The plaintiff's

claims against the DFA entities stated in Count I are

hereby DISMISSED.

The motion for summary judgment by the outside

director defendants Gardiner, LeBlond, Dickson, Blount,

Rymer, Pearson, and Ferguson [bankr. docket no. 482] is

GRANTED in part and DENIED in part. The motion is

GRANTED as to Counts I, II and IV. The plaintiff's

claims against the outside director defendants stated in

Counts I, II and IV of the plaintiffs complaint are

hereby DISMISSED. The motion is DENIED as to the

plaintiff's claims against the outside director defendants

stated in Count III.

The motion for summary judgment by defendant

Dillard Munford [bankr. docket no. 505] is GRANTED in

part and DENIED in part. The motion is GRANTED as

to Counts I, II, IV and V. The plaintiff's claims against

defendant Dillard Munford stated in Counts I, II, IV and

V of the plaintiffs complaint are hereby DISMISSED.

The motion is DENIED as to the plaintiffs claims

against defendant Dillard Munford stated in Count III.

The motion for summary judgment by defendants

Fellows and Carroll [bankr. docket no. 508] is GRANTED

App. 51

in part and DENIED in part. The motion is GRANTED

as to Counts I, II, IV and V. The plaintiff's claims

against defendants Fellows and Carroll stated in Counts

I, II, IV and V of the plaintiff's complaint are hereby

DISMISSED. The motion is DEN IED as to the plaintiff's

claims against defendants Fellows and Carroll stated in

Count III.

The motion for Summary judgment by defendants

Hardin and Rubel [docket no. 510] is GRANTED. The

plaintiff’s claims against defendants Hardin and Rubel

stated in Count I are hereby DISMISSED.

SO ORDERED, this 10th day of August, 1994.

/s/_G. Ernest Tidwell]

G. ERNEST TIDWELL

JUDGE, UNITED STATES DISTRICT COURT

App. 52

[Dated April 4, 1994]

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

IN RE: :

: CASE NO.

MUNFORD, INC., d/b/a : A90-00078-SWC

MAJIK MARKET, :

Debtor. : CHAPTER 11

MUNFORD, INC.,

Plaintiff, :

vs. : ADVERSARY

7 : NO. 91-6417

DILLARD MUNFORD; RUSSELL C.

FELLOWS; WINTON M. BLOUNT;

HERBERT J. DICKSON; JAMES L.

FERGUSON; ROBERT M. GARDINER;

RICHARD K. LeBLOND II; ANDRALL

E. PEARSON; S.B. RYMER, JR.;

JAMES M. CARROLL; JOSEPH W.

HARDIN; JAY E. RUBEL; PROVIDENT

NATIONAL BANK, as Trustee for

the DFA GROUP TRUST; STATE

STREET BANK & TRUST COMPANY,

as Trustee for the DFA GROUP, as

Trustee for the DFA GROUP TRUST;

DFA INVESTMENT DIMENSIONS :

GROUP, INC.; VALUATION RESEARCH :

CORPORATION and SHEARSON

LEHMAN BROTHERS INC.,

Defendants.

OPINION

Before the court are motions for summary judgment

filed by the defendants as follows: (1) DFA Investment

Dimensions Group Inc. (“DFA Fund”), Provident Nation-

a OO—EE—E—E—E————

App. 53

al Bank, as trustee of the DFA Group Trust, and State

Street Bank & Trust Company, as trustee of the DFA

Participating Group Trust (“DFA Trusts”) (collectively

referred to herein as “DFA Entities”); (2) Dillard

Munford; (3) outside directors Winton M. Blount, Herbert

J. Dickson, James L. Ferguson, Robert M. Gardiner,

Richard K. LeBlond II, Andrall E. Pearson, and S.B.

Rymer, Jr.; (4) Jay E. Rubel and Joseph Hardin; and (5)

James M. Carroll and Russell C. Fellows. Also, before

the court is a motion for partial summary judgment and

to strike, certain affirmative defenses filed by plaintiff,

Munford, Inc. (“Munford”), and motions to strike Mun-

ford’s responsive statement of material facts and to

strike the Declaration of Neal S. Berinhout filed by de-

fendants Carroll, Fellows, Hardin and Rubel.! This ad-

versary proceeding involves both non-core and core

matter claims pursuant to 28 U.S.C. § 157. The court’s

proposed findings of fact and conclusions of law are set

forth hereinafter.

FACTS

Munford was a specialty retailer with three primary

business units: (1) Majik Market; (2) World Bazaar; and

(3) LeeWards Creative Crafts. In addition, Munford

owned 50.4% of the outstanding shares of United Refrig-

erated Services, Inc. Munford’s principal business was its

chain of Majik Market stores.

?

.

Defendant, Shearson Lehman Brothers, Inc., also filed a mo-

tion for summary judgment which is addressed in a separate

App. 54

Prior to November 29, 1988, Munford was a publicly-

held Georgia corporation founded by defendant Dillard

Munford. Throughout 1987 and until November 29, 1988,

various defendants herein served as officers or directors

of Munford. The officers consisted of Dillard Munford,

Chief Executive Officer; Russell C. Fellows, President

and Chief Operating Officer; James M. Carroll, Executive

Vice President and Secretary; Joseph W. Hardin, Vice

President and Treasurer; and Jay E. Rubel, Vice Presi-

dent/Administration. The directors consisted of Dillard

Munford, Chairman; Russell C. Fellows; and outside

directors, Robert M. Gardiner, Richard K. LeBlond I,

Herbert J. Dickson, Winton M. Blount, S.B. Rymer, dr.,

Andrall E. Pearson, and James L. Ferguson (collectively

referred to as the “outside directors”). At all relevant

times, each of the officers were shareholders of Munford

and controlled options to purchase additional shares.

Also, outside directors Dickson, Gardiner, LeBlond, and

Rymer were shareholders of Munford.

Defendants, DFA Entities, are former shareholders of

Munford whose shares were tendered and purchased in

the LBO.? On November 29, 1988, DFA Entities benefi-

cially owned 234,158 shares of Munford common stock.°

2 The DFA Fund is a registered open-end management com-

pany, commonly referred to as a mutual fund. The shares of

this fund are primarily owned by tax-exempt institutional in-

vestors who, for the most part, are qualified pension and profit

sharing plans holding assets for the benefit of retirees. The

DFA Trusts are investment vehicles whose participants are,

like the owners of the DFA Fund, tax-exempt and profit shar-

ing plans.

’ Some of the current shareholders and participants in the

DFA Fund and DFA Trusts did not hold their interests in

(continued...)

App. 55

In August of 1987, Munford’s board of directors re-

tained the services of defendant Shearson Lehman

Brothers, Inc. (“Shearson”) to evaluate Munford and to

make recommendations regarding its future. In Septem-

ber of 1987, Shearson presented a written financial

report analyzing the alternatives available to Munford to

maximize shareholder value. (Deposition Exhibit No. 5).

It concluded that “. . the sale of 100% of (Munford’s]

common stock is the most effective means of maximizing

Shareholder value . . . .” Based on its analysis of

Munford’s historical and projected operating results,

Shearson further concluded that a leveraged buyout or

leveraged recapitalization would not be a feasible alter-

native to maximize shareholder value. (Id. at Sec. V).

After reviewing Shearson’s financial report, the directors

authorized Shearson to prepare an offering memorandum

and to solicit potential purchasers,

Shearson approached approximately 160 potential buy-

ers, distributed the memorandum to approximately 80

potential buyers, and received 14 preliminary bids. None

of these bids came to fruition, although there was an

unsuccessful effort to negotiate a leveraged buyout with

Deutschman & Co., one of these bidders.

Thereafter, F. Philip Handy, an individual financier,

organized a group of investors (collectively referred to as

the “new investors”) to acquire all of Munford’s stock for

* (...continued)

November of 1988. Likewise, some of the shareholders and

participants in November of 1988 are not currently sharehold-

ers or participants.

App. 56

$18.50 per share.* The new investors presented a pro-

posed agreement in principal to acquire Munford by a

leveraged buyout (“LBO”). This proposal was considered

by Munford’s board of directors on May 23, 1988. At this

meeting, James Rubright, counsel for Munford, discussed

the proposal and explained the factors set forth in Article

IX of Munford’s articles of incorporation to be considered

by the directors in evaluating the proposal.

Munford’s board of directors unanimously approved the

proposed agreement and began pursuing a definitive

agreement. On June 1, 1988, Munford’s board of direc-

tors considered the financing arrangements of the new

investors. Mr. Handy, who was present for part of this

meeting, indicated that financing for the proposed pur-

chase would come from commercial banks with as little

equity participation by himself and his group as possible.

To accomplish the LBO, the new investors formed

Alabama Acquisition Corporation (“AAC”) and Alabama

Merger Corporation (“AMC”), a wholly owned subsidiary

of AAC. It was agreed that AMC and Munford would

merge, with Munford being the survivor. Both AAC and

AMC were shell corporations. At the May 23 meeting,

Rubright informed the directors of this fact.

In consideration a loan commitment for the proposed

LBO, Citicorp, N.A. (“Citicorp”) prepared an internal sol-

* The new investors included the following: (1) Handy; (2)

Panfida Limited, an Australian corporation involved in the

business of investing in other corporations; (3) “Investing in

Success” Equities Plc, an investment trust company organized

under the laws of the United Kingdom and involved in the

business of investing in both public and private companies;

and (4) Panfida USA, Inc., a Florida corporation and a wholiy

owned subsidiary of Panfida Limited.

App. 57

vency analysis of post-merger Munford and concluded

that the proposed merger/LBO transaction would not

render Munford insolvent. Thereafter, it retained Valua-

tion Research Corporation (“Valuation Research”) to pre-

pare a solvency opinion. Valuation Research also con-

cluded that Munford would not be rendered insolvent

following the merger/LBO transaction.

On August 9, 1988, Munford’s directors approved and

the parties executed the Amended and Restated Agree-

ment and Plan of Merger (“Merger Agreement”) which

reduced the purchase price to $17 for each share of Mun-

ford’s common stock.° This Agreement provided in section

3.2(b) that AAC and AMC, would“... deposit or cause to

be deposited in trust with an Exchange Agent,” mutually

acceptable to AAC and Munford, sufficient cash to pur-

chase Munford’s outstanding common stock at $17 per

share. The Merger Agreement further provided that

these funds could not be used for any other purpose and

required both AAC and Munford to give the Exchange

Agent irrevocable written instructions to make the cash

payments to shareholders as provided in section 3.2(a).

(Deposition Exhibit No. 1, Merger Agreement, section

3.2(b)). Citizens & Southern Trust Company (Georgia),

N.A. (“Citizens & Southern Trust”), a trust company, was

employed to serve as the Exchange Agent.

Citicorp issued a commitment to AAC and Wicker

Corporation (“Wicker”), an affiliate of the new investors,

to provide financing consisting of a $54.8 million revolv-

® At this meeting, Shearson delivered a written report stating

its preliminary opinion that the purchase price of $17 per

App. 58

ing credit loan facility to Munford and a $14 million

revolving credit loan facility and a $3 million term loan

to World Bazaar, Inc. (“World Bazaar”) for a total of

$71.8 million. The Citicorp commitment required that its

total financing be secured by all of Munford’s and World

Bazaar’s assets with Munford unconditionally guarantee-

ing World Bazaar’s loans. The World Bazaar loan facility

was intended to permit Wicker to purchase World

Bazaar. However, the purchase and sale of World Bazaar

was not a condition of the Merger Agreement. (Deposi-

tion Exhibit No. 1, Merger Agreement at section 9.6).

Nevertheless, the proceeds of this asset sale were used

by Munford to partially fund the LBO.

On November 29, 1988, AAC acquired Munford

through a $90,604,348.63 LBO.® Only $550,000 in new

capital was received by Munford as a result of the

merger of AMC. There was a corresponding requirement

for the payment of a $550,000 fee to an AAC affiliate,

® The sources of funding for the LBO was as follows:

Source Amount

Munford Cash $14,238,000

AMC Cash 550,000

Proceeds of Munford Citicorp Loans 53,244,000

Munford Redemption of C&S

CD’s (insurance trade L/C) 2,700,000

Proceeds of Purchase Money Note

for Sale of World Bazaar 18,000,000

Proceeds of World Bazaar Intra

Company Receivables Note 3,100,000

WBI Contribution for Closing Costs 650,000

Total $92,482,000

(Deposition Exhibit No. 378).

EE EEE

App. 59

Winter Park Capital. The receipt of these funds and

payment of this fee occurred simultaneously.

In a draw request dated November 29, 1988, F. Philip

Handy as chairman of Munford, Inc., requested initia]

Munford borrowings from Citicorp of $53,244,000.’ The

request directed the transfer of $26,580,814.58 of the

Citicorp loan proceeds to Munford, Inc. account

#00168005 at The Citizens and Southern National Bank

(“C&S”). Munford then transferred $61,811,235 from its

C&S account #00168005 to Citizens & Southern Trust,

the Exchange Agent. These funds were used to purchase

Munford’s outstanding shares of common stock at $17

per share, except for AAC or AMC shares. Additionally,

a portion of the LBO closing costs and creditor claims

were also paid from the C&S account. This left a balance

of $2,454,569.08 in Munford’s account. The balance of the

Citicorp loan proceeds were disbursed by Citicorp pur-

suant to Munford’s draw request to pay various claims

of existing Munford creditors or other loan and LBO

closing costs. (Deposition Exhibit No. 378).

On November 29, 1988, in a series of simultaneous

transactions, the LBO was consummated by the Merger

of AMC and Munford, with Munford emerging as the

surviving corporation. As Provided in section 3.1(a) of the

Merger Agreement, all shares of Munford common stock

owned by AMC were retired with no consideration

” This left Munford with an unused line of credit availability

of $1,556,000.

App. 60

On January 2, 1990, Munford filed for bankruptcy

protection under Chapter 11. On June 17, 1991, Munford

filed its complaint for the benefit of Munford’s estate and

its unsecured creditors.® On July 23, 1992, Munford filed

its amended and restated complaint.

DISCUSSION

Federal Rule of Civil Procedure 56, made applicable by

Bankruptcy Rule 7056, provides for the granting of sum-

mary judgment if “. . . there is no genuine issue as to

any material fact and . . . the moving party is entitled to

a judgment as a matter of law.” Fed. R. Civ. P. 56(c). A

fact is material if it “. . . might affect the outcome of the

suit under the governing (substantive) law .. . .” Ander-

son v. Liberty Lobby, Inc., au U.S. 242, 248 (1985). A

dispute of fact is genuine “. . . if the evidence is such

that a reasonable jury col return a verdict for the

nonmoving party.” Id. The moving party has the burden

of establishing the right of summary judgment. Clark v.

Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991);

Clark v. Union Mut. Life Ins. Co., 692 F.2d 1370, 1372

(11th Cir. 1982); United States Steel Corp. v. Darby, 516

F.2d 961, 963 (5th Cir. 1975).

In determining whether there is a genuine issue of

material fact, the court must view the evidence in the

light most favorable to the party opposing the motion.

Adickes v. S. H. Kress & Co., 398 U.S. 144, 157 (1970);

Rosen y. Biscayne Yacht & Country Club, Inc., 766 F.2d

® Munford as a debtor in possession is authorized to exercise

powers of a trustee under 11 U.S.C. § 1107(a), with certain

non-relevant exceptions.

App. 61

482, 484 (11th Cir. 1985); United States v. Oakley, 744

F.2d 1553, 1555 (11th Cir. 1984). The moving party must

identify those evidentiary materials listed in Federal

Rule 56(c) that establish the absence of a genuine issue

of material fact. Celotex Corp. v. Catrett, 477 U.S. 317,

323-24 (1986); see also Fed. R. Civ. P. 56(e). Once the

motion is supported by a prima facie showing that the

moving party is entitled to judgment as a matter of law,

a party opposing the motion must go beyond the plead-

ings and demonstrate that there is a material issue of

fact which precludes summary judgment. Celotex, 477

U.S. at 324; Coats & Clark, 929 F.2d at 608.

Defendants Carroll, Fellows, Hardin, and Rubel have

moved to strike Munford’s responsive statement of ma-

terial facts. They assert that Munford’s statement does

not comply with Local Rule 220-5(b)(2) because Munford

failed to attach to its response a separate statement of

material facts as to which it contends there exists a

genuine issue to be tried. This contention is without

merit. The last three pages of Munford’s statement in-

dicate which of the defendants’ joint statement of facts

are disputed and which are undisputed. With regard to

the disputed facts, Munford references the relevant para-

graphs in its statement in which it contends that there

are genuine issues to be tried.

These defendants also contend that the majority of

Munford’s stated facts are legal arguments or conclu-

sions. However, defendants have not identified with spe-

cificity the objectional paragraphs or the legal argu-

ments. While several paragraphs in Munford’s statement

contain legal argument, the court does not find that

Munford’s statement prejudices defendants in any ma-

terial way. Moreover, the court will disregard the legal

App. 62

arguments and conclusions within the statement of facts.

Thus, the motion to strike Munford’s statement should

be denied.

Next, Munford has moved for partial summary judg-

ment and to strike several affirmative defenses asserted

by defendants as follows: (1) Munford participated in the

transaction and was the grantor of the fraudulent con-

veyance;® (2) Munford is estopped from asserting its

claims;’° (3) Munford’s lack of standing;” (4) the doctrine

of laches;’ (5) Munford’s failure to join indispensable

parties;’ and (6) Munford’s claims are barred by its set-

tlement agreement with TOC Retail, Inc.“

In support of its motion, Munford filed a statement of

undisputed facts based upon a document entitled “Decla-

ration of Neal S. Berinhout.” Defendants Carroll, Fel-

lows, Hardin, and Rubel have moved to strike the Ber-

inhovt declaration contending that the statements there-

in are conclusory and an attempt to substitute the judg-

ment of Munford’s counsel for that of the trier of fact.

The court agrees.

® See Fourth Defense of DFA Entities.

10 See Second Defense of Carroll and Fellows; Sixth Defense

of DFA Entities, Eighth Defense of Hardin and Rubel; Elev-

enth Defense of Ferguson and Pearson; Twelfth Defense of

Dillard Munford, Blount, Dickson, Gardiner, LeBlond, and

Rymer.

11 See Fourth and Fifth Defense of DFA Entities.

12 See Third Defense of DFA Entities; Eleventh Defense of

Carroll, Fellows, Hardin, and Rubel.

13 All of the defendants assert the defense that Munford has

failed to join indispensable parties.

4 See Tenth Defense of Hardin and Rubel.

App. 68

Rule 56(e) provides that Supporting or opposing affi-

davits must be made on personal knowledge, must set

forth facts that would be admissible in evidence, and

must show affirmatively that the affiant is competent to

testify to the matters stated therein. Fed. R. Civ. P.

56(e). An affidavit submitted pursuant to Rule 56(e) may

not properly set forth the following: (1) ultimate or con-

clusory facts; (2) conclusions of law; (3) statements made

on belief or “on information and belief:” and (4) hearsay

testimony and opinion testimony which would be inad-

missible at trial. See 10A C. Wright, A. Miller, & M.

Kane, Civil 2d, § 2738,

p. 486-489 (1983): 6 J.W. Moore, Moore’s Federal Prac-

tice, | 56-22[1] (2nd ed. 1988).

The Berninhout declaration improperly sets forth ulti-

mate or conclusory facts and conclusions of law based on

the opinion of counsel. The court concludes, therefore,

that this declaration should be stricken. Munford has not

otherwise supported its motion and has failed to Carry its

initial burden of proof. See Celotex, Supra, 477 U.S. at

323-24. Accordingly, Munford’s motion for partial sum-

mary judgment should be denied.

Next, Munford seeks to strike certain defenses asserted

by defendants. Pursuant to Federal Rule of Civil Pro-

cedure 12(f), made applicable by Federal Rule of Bank-

ruptcy Procedure 7012(b), “the court may order stricken

from any pleading any insufficient defense or any re-

dundant, immaterial, impertinent, or scandalous matter.”

Fed. R. Civ. P. 12(f). While courts have broad discretion

in resolving motions to strike, such motions are not fa-

vored by the federal rules. See v.

, 807 F.Supp. 765, 769 (N.D. Ga. 1992). As

noted in

App. 64

[w]here a defense is insufficient as a matter of

law, it should be stricken to eliminate the unnec-

essary delay and expense of litigating it. Howev-

er, “motions to strike can not be used to deter-

mine disputed fact questions, nor can they be

used to decide disputed and substantial questions

of law, particularly when there is no showing of

prejudice to the movant.”

Id. at 769 (citations omitted).

Various defendants herein have withdrawn or agreed

that certain of their defenses are not available as follows:

(1) Tenth Defense of Dillard Munford, Ferguson, Pear-

son, Blount, Dickson, Gardiner, LeBlond, and Rymer

based on Federal Rule of Civil Procedure 9(b); (2) Third

Defense of Carroll and Fellows, Ninth Defense of Hardin

and Rubel; Twelfth Defense of Ferguson and Pearson;

_and Thirteenth Defense of Blount, Dickson, Gardiner,

LeBlond, Rymer and Dillard Munford based on failure to

join indispensable parties; (3) the “unclear hands” de-

fense set forth in the Eleventh Defense of Hardin and

Rubel; and (4) Tenth Defense of Hardin and Rubel based

on Munford’s claims being barred by the settlement with

TOC Retail, Inc. Each of these defenses should be

stricken.

Dillard Munford, Carroll, Fellows, Hardin, Rubel, and

the outside directors assert as defenses that Munford has

waived the right to maintain this action due to the

shareholders’ approval of the LBO and Munford’s know!l-

edge of, consent to, and acquiescence in the LBO bar

recovery. Further, DFA Entities assert that Munford’s

claims are barred by the doctrine of “unclean hands.”

However, defendants have not cited and this court has

not found authority to support these defenses. It is a

App. 65

fundamental principal of corporate law that “[ajs a legal

entity, a corporation is separate and distinct from its

officers, stockbrokers, and agents.” See Casey v. Car-

rollton Ford Co., 152 Ga. App. 105, 106, 262 S.E.2d 255

(1979). In addition, officers and directors may be liable

for breaches of fiduciary duties owed to a corporation.

See Qui i ici , 254 Ga.

216, 217, 326 S.E.2d 460 (1985). As such, the actions of

Munford’s former officers and directors as well as its

former shareholders cannot waive the claims of Munford

against said officers and directors. Accordingly, the court

concludes that the “waiver” and “unclean hands” defens-

es are insufficient as a matter of law and should be

stricken.

Defendants Hardin and Rubel also assert the defense

of in pari delicto which bars an action where the parties

are-equally culpable. Defendants do not indicate how

Munford or its creditors were equally culpable for the

acts or omissions of defendants, and have cited no auth-

ority to support this position. As such, this defense is

insufficient as a matter of law. Accordingly, the court

concludes that the in pari delicto defense set forth in the

Eleventh Defense of Hardin and Rubel should be strick-

en.

Only DFA Entities continue to assert a failure to join

indispensable parties. This defense is based on Federal

Rule of Civil Procedure, made applicable by Federal Rule

of Bankruptcy Procedure 7019. DFA Entities, however,

have failed to demonstrate that the addition of other

parties is necessary for a just adjudication of Munford’s

claims against them. The complaint seeks to recover al-

leged fraudulent conveyances and no additional parties

appear necessary for this determination. The court,

|

—_——————

App. 66

therefore, concludes that this defense is insufficient as a

matter of law and should be stricken.

DFA Entities assert a lack of bankruptcy court juris-

diction to conduct a jury trial of Munford’s fraudulent

conveyance claim. See Granfinanciera S.A. v. Nordberg,

492 U.S. 33 (1989). Munford agrees. The majority of cir-

cuit courts that have considered this issue have con-

cluded that the bankruptcy courts are without jurisdic-

tion to conduct jury trials. See In re Grabill Corp., 976

F.2d 1126, 1127 (7th Cir. 1992); In re Baker & Getty

Fin. Servs., Inc., 954 F.2d 1169, 1173 (6th Cir. 1992); In

re Kaiser Steel Corp., 911 F.2d 380, 392 (10th Cir. 1990);

In re United Mo. Bank of Kansas City, N.A., 901 F.2d

1449, 1453-57 (8th Cir. 1990). See also Orion Pictures

Corp. v. Showtime Networks, Inc. (In re Orion Pictures

Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993) (Second Circuit

held that the Constitution prohibits bankruptcy courts

from holding jury trials in non-core matters); but see In

re Ben Cooper, Inc., 896 F.2d 1394, 1402-04 (2d Cir.

1990), cert. granted, 497 U.S. 1023, 110 S.Ct. 3269, 111

L.Ed.2d 779, vacated and remanded on other grounds,

498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990)

reinstated, 924 F.2d 36, cert. denied, ___ ~U.S. __, 111

S.Ct. 2041, 114 L.Ed.2d 126 (1991) (Second Circuit held

that bankruptcy court has power to hold jury trials in

core proceedings). This court agrees with the majority.

Munford has otherwise withdrawn its motion to strike

DFA Entities’ Second Defense.

Only defendants Carroll, Fellows, Hardin, and Rubel

continue to assert an affirmative defense based on Fed-

eral Rule of Civil Procedure 9(b), made applicable by

Federal Rule of Bankruptcy Procedure 7009. Rule 9(b)

provides that “[iJn all averments of fraud or mistake, the

App. 67

circumstances constituting fraud or mistake shall be

stated with particularity.” These defendants contend that

there are no allegations in the amended complaint which

indicate that fraud or bad acts of any type were commit-

ted. Munford’s amended complaint alleges and describes

the events leading to and culminating in the LBO and

that:

[t]he payments by . . . Munford to each of the

(sJhareholder [defendants for their shares and

for options constituted fraudulent conveyances in

violation of O.C.G.A. § 18-2-22(3), because...

Munford did not receive valuable consideration

for the payments made, and because it was in-

solvent at the time, or rendered insolvent, having

insufficient funds with which to pay its debts as

they become due and having remaining property

of insufficient value to satisfy its debts i full.

(Amended Complaint at 89). Under notice pleading,

Munford has alleged its fraudulent conveyance claim

with sufficient particularity. To establish its claim, Mun-

ford need only prove the requisite elements of O.C.G.A.

§ 18-2-22(3). See Loeb v. Dante, (Ji_re Dante), 1 B.R.

547, 548-49 (Bankr. N.D. Ga. 1979). Once these elements

are proven, “... the law conclusively presumes a fraudu-

lent intent and declares the [transfer] void ... .” Mer-

cantile Nat. Bank v. Aldridge, 233 Ga. 318, 321, 210

S.E.2d 791 (1974); see also Neal v. Stapleton, 203 Ga.

236, 243, 46 S.E.2d 130 (1948). Consequently, it is un-

necessary for Munford to plead facts in its amended

complaint which show a “fraudulent intent” or bad acts

on the part of any defendant. The Sixth Defense of

Carroll, Fellows, Hardin, and Rubel should be stricken.

App. 68

The court will now address the various summary judg-

ment motions of the defendants as they relate to the

counts of Munford’s amended complaint.

I. COUNT I

In Count I, Munford asserts that the payments to

shareholders for their shares in connection with the

Munford LBO constitute fraudulent conveyance in vio-

lation of O.C.G.A. § 18-2-22(3). The shareholder defen-

dants named in Count I are Dillard Munford, Fellows,

Dickson, Gardiner, LeBlond, Rymer, Carroll, Hardin,

Rubel, and DFA Entities (collectively referred to herein

as the “shareholder defendants”).

Shareholder defendants Dillard Munford, Carroll, and

Fellows first contend that Munford has standing to

assert fraudulent conveyance claims only on behalf of

those creditors who were creditors at the time of the

Munford LBO and who remained creditors upon the

filing of the Chapter 11 petition. These defendants cite

First National Bank of Cartersville v. Bayless, 96 Ga.

684 (1895), to support their position that a transfer is

not subject to challenge on behalf of subsequent creditors

absent actual intent to defraud.

A trustee or debtor in possession may utilize the

“strong arm” provision of 11 U.S.C. § 544(b) to avoid a

transfer under applicable state law.’* Therefore, Munford

© This section provides that:

[t]he trustee [or debtor in possession] may avoid any

transfer of an interest of the debtor in property or any

obligation incurred by the debtor that is voidable

(continued...)

App. 69

must establish at least one actual, unpaid, and unse-

cured creditor whose claim existed at the time the Mun-

ford LBO occurred. See Dante, supra, 1 B.R. at 548; see

also Schaps v. Bally’s Park Place, Inc., 58 B.R. 581, 584

(E.D. Pa. 1986); Hadley v. Acquafredda (In re Acqua-

fredda), 26 B.R. 909, 911 (Bankr. M.D. Fla. 1983).

In opposition to defendants’ motion, Munford submit-

ted the affidavit of Michael Langford in which he sets

forth numerous claims which arose prior to the LBO and

remained unpaid on the filing date of the Munford peti-

tion. (Affidavit of Michael Langford, 7 8). A summary of

pre-LBO claimants who filed 47 proofs of claim totaling

approximately $7 million is attached as Exhibit 2 to

Langford’s affidavit. These facts and the existence of

these claims are not disputed by any of the defendants.

Defendant Dillard Munford argues, however, that such

proofs of claim are not allowed claims. The argument is

frivolous. “[A] claim or interest, proof of which is filed

under section 501, is deemed allowed, unless a party in

interest . . . objects.” 11 U.S.C. § 502(a).° There is no

evidence of any objections to any of these proofs of claim.

Moreover, Munford need only establish the existence of

© (...continued)

under applicable law by a creditor holding an unse-

cured claim that is allowable under section 502 of this

title or that is allowable only under section 502(e) of

this title.

11 U.S.C. § 544(b).

‘© Pursuant to 11 U.S.C. § 1111(a), any claim in the debtor’s

schedules which is not listed as disputed, contingent, or unliq-

uidated is “deemed filed” without the filing of an actual proof

of claim.

App. 70

one allowable claim. The undisputed evidence establishes

numerous such claims.

Further, the shareholder defendants contend that any

fraudulent conveyance recovery is limited to the value

equal to the amount of the claims asserted by those cred-

itors whose claims existed on the date of the Munford

LBO. This contention, likewise, is without merit. Section

544(b), which codifies the Supreme Court’s decision in

Moore v. Bay, 284 U.S. 4 (1931), allows the entire

transfer to be avoidable under applicable state law for

the benefit of the entire estate. “Since the recovery is for

the benefit of the estate, all creditors holding unsecured

claims share in the recovery, not merely those creditors

whose rights are asserted.” 4 Collier on Bankruptcy,

{ 544.03 (15th ed. 1989); see also Robinson v. Atlas (In

re Hecht), 51 B.R. 72, 76 (Bankr. D. Vt. 1985); Bergquist

v. Theisen (In re Theisen), 45 B.R. 122, 126-27 (Bankr.

D. Minn. 1984); Dante, supra, 1 B.R. at 548. Therefore,

Munford may avoid in toto conveyances determined to be

fraudulent and voidable under state law.

Next, the shareholder defendants cite Credit Managers

Ass'n of Southern Cal. v. Federal Co., 629 F.Supp. 175

(C.D. Cal. 1985), contending that fraudulent conveyance

laws should not be used to recover funds paid to share-

holders in 2 public, arm’s length merger transaction.

While questioning whether general fraudulent convey-

ance law is applicable to LBO transactions, the Califor-

nia district court did not rule on the issue because of the

parties’ failure to brief same. Id. at 179; see Baird &

Jackson,

Domain, 38 Vand. L. Rev. 829 (May 1985)). Thus, this

case is not helpful.

App. 71

A majority of courts have concluded that the fraudu-

lent conveyance provisions in the Bankruptcy Code

(“Code”) or under applicable state law may extend to

LBO transactions. See

Credit, Inc., 971 F.2d 1056 (3d Cir. 1992) (the court ap-

plied the Pennsylvania constructive fraud provision,

adopted from sections 4 and 5 of the Uniform Fraudulent

Conveyance Act (“UFCA”)); Mellon Bank, N.A. v. Metro

Communications, Inc., 945 F.2d 635 (3d Cir. 1991) (court

applied the constructive fraud provision of § 548(a)(2));

, 803 F.2d

1288 (3d Cir. 1986); Kendall v. Sorani (In re Richmond

Produce Co., Inc.), 151 B.R. 1012 (Bankr. N_D. Cal.

1993); Vadnais Lumber Supply, Inc. v. Byrne (In_re

Vadnais Lumber Supply, Inc.), 100 B.R. 127 (Bankr. D.

Mass. 1989); In_re Ohio Corrugating Co., 70 B.R. 920

(Bankr. N.D. Ohio 1987). Other courts, while recognizing

that general fraudulent conveyance provisions apply to

LBOs, have insulated selling shareholders with no

knowledge of the LBO transaction from fraudulent con-

veyance liability. See Lippi v. City Bank, 955 F.2d 599

(9th Cir. 1992); Kupetz v. Wolf, 845 F.2d 842 (9th Cir.

1988); Wei in, 94 B.R. 488

(N.D. Ill. 1988) (“Weiboldt I”). This court agrees with the

majority view and concludes that fraudulent conveyance

laws may extend to LBO transactions.

A. Avoidability of fraudulent conveyances under

Georgia law

Munford seeks to avoid payments made to the share-

holder defendants under 11 U.S.C. § 544(b) and the

Georgia constructive fraud provision of 0.C.G.A. § 18-2-

App. 72

22(3). The Georgia statute provides in pertinent part

that:

[t]he following acts by debtors shall be fraudulent

in law against creditors and as to them shall be

null and void: ...

(3) Every voluntary deed or conveyance,

not for a valuable consideration, made by

a debtor who is insolvent at the time of

the conveyance.

0.C.G.A. § 18-2-22(3). To establish a fraudulent convey-

ance under this statute, Munford must establish three

elements as follows: (1) a conveyance by Munford of its

property to the shareholder defendants; (2) the convey-

ance was voluntary and not for a valuable consideration;

and (3) Munford was insolvent or rendered insolvent at

the time of the conveyance. See Brown v. Citizens &

Southern National Bank, 253 Ga. 119, 122, 317 S.E.2d

180 (1984); Leachman v. Cobb Dev. Co., 226 Ga. 103,

104, 172 S.E.2d 688 (1970).

Insolvency. First, all parties agree that there is a

genuine issue of material fact with regard to whether

Munford was rendered insolvent at the time of the LBO

transaction. Munford conceded in oral argument that it

was not insolvent immediately prior to the LBO but

contends it was rendered insolvent by the LBO transac-

tion. The shareholder defendants contend, however, that

summary judgment is appropriate because Munford can-

not prove either the first or second requirement.

Conveyance of Munford Property. The facts are not

disputed as to the source of the funds used to pay

Munford shareholders. Munford transferred $61,811,235

from its C&S account #00168005 to Citizens & Southern

App. 73

Trust, the Exchange Agent. (Deposition Exhibit 378).

These funds were used to pay the shareholders for their

shares at $17 per share. While Munford was not the

entity which undertook to purchase these shares, the

evidence clearly establishes that the funds transferred to

the Exchange Agent were property of Munford.

-V i ion. Next,

the shareholder defendants contend that the Munford

LBO was not “voluntary” because Munford received

“valuable consideration” in exchange for the payments

made to them as part of an arm’s length, legitimate busi-

ness transaction. In Georgia, a “voluntary conveyance” is

defined as a transfer “without consideration.” Brown, 253

Ga at 122. “A valuable consideration is founded on

money, or something convertible into money, or having

a value in money.” Stokes v. McRae, 247 Ga. 658, 659,

278 S.E.2d 393 (1981)."” “Great inadequacy of consider-

ation in the transfer of property creates strong inferences

that the transfer was fraudulent.” United States v.

McMahan, 392 F.Supp. 1159, 1166 (N.D. Ga. 1975), aff'd,

United States v. McMahan, 556 F.2d 362 (5th Cir. 1977),

'’ In contrast, pursuant to 11 U.S.C. § 548(a\(2), a trustee or

debtor in possession is allowed to avoid a transfer made by the

debtor within one year of the filing of the bankruptcy petition,

where the debtor received

value” and became insolvent as a result of the transfer. Be-

cause Munford filed for bankruptcy more than one year after

the LBO transaction, the constructive fraud provision of § 548

is not available to Munford.

App. 74

McMahan, 569 F.2d 889 (5th Cir. 1978)."* Georgia law

does not provide, however, for avoidance of a transfer

merely for “less than equivalent value” if in fact a valu-

able consideration was received.

The shareholder defendants contend that Munford re-

ceived “valuable consideration” in connection with the

LBO as follows: (1) $550,000 in cash; (2) payment of a

$20 million debt to Aetna Life and Casualty Co.

(“Aetna”); (3) a line of credit with unused availability; (4)

new management; (5) Munford stock worth approximate-

ly $5 million; and (6) a federal income tax benefit of

approximately $5.4 million as a result of the sale of

World Bazaar.

At closing, Munford received $550,000 in the merger

with AMC. However, Munford simultaneously paid

$550,000 as a fee to Winter Park Capital, an affiliate of

AAC. (Deposition Exhibit No. 378). Munford never had

dominion over or received any benefit from these funds.

This appears to be merely a pass-through of funds. By

merger $550,000 came in and by simultaneous wire

transfer $550,000 went out. A jury could find that Mun-

ford was merely a “conduit” for the $550,000 payment.

The court concludes, therefore, that there is a genuine

issue of material fact regarding whether the $550,000

received in the merger with AMC constitutes “valuable

consideration.”

Munford concedes that a $20 million note payable to

Aetna Life and Casualty Company (“Aetna”) was paid,

'® See Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th

Cir. 1981) (decisions rendered by former Fifth Circuit prior to

October 1, 1981, adopted as precedent by the Eleventh Cir-

cuit).

App. 75

including a pre-payment penalty of over $2 million.

However, Munford entered into a new debt based upon

the Citicorp financing of $54.8 million.’ At the time,

Munford was under no obligation or compulsion to pay

off the Aetna note. In fact, Munford was current on all of

its existing debt with approximately $14 million in cash

reserves. It appears that the Aetna and other debt was

paid to clear title to Munford’s assets pledged as security

to Citicorp, even though the Aetna payoff resulted in a

$2 million penalty.

Further, the new Citicorp indebtedness was at higher

interest rates that those of the old debt. Munford’s debt

to equity ratio was .26 to 1.0 immediately before the

LBO transaction and 9.0 to 1.0 immediately after the

Munford LBO. (Deposition Exhibit No. 429, Exhibit 7(1)).

Thus, Munford’s financial condition actually diminished

as a result of this more onerous and burdensome new

debt. A jury could find that the pay off of Aetna, and

other old debt, was not a valuable consideration or that

it was grossly inadequate consideration for the LBO. As

such, there are genuine issues of material fact regarding

whether or not Munford received “valuable consider-

ation” by paying off the old debt.

Defendants contend that Munford received a revolving

line of credit, access to which served as “valuable consid-

eration.” Citicorp’s financing commitment provided for a

$54.8 million revolving credit loan facility in favor of

Munford. However, Munford’s access to a revolving line

'® Munford also guaranteed the Citicorp loans to World

Bazaar of approximately $17 million, although the World

Bazaar sale was not required by the Merger Agreement. This

brought the total new debt to $71.8 million.

App. 76

of credit is not a contribution of any measurable mone-

tary value. Even if there is some value, it would appear

to be grossly inadequate consideration for the obligations

incurred.

The shareholder defendants further contend that the

acquisition of new management constitutes “valuable

consideration” sufficient to support the Munford LBO. In

support, the shareholder defendants cite C-T of Virginia,

Inc. v. Euroshoe Assoc. Ltd. Partnership, 762 F.Supp.

675 (W.D. Va. 1991), aff'd, C-T of Virginia, Inc. v. Euro-

shoe Assoc. Ltd. Partnership, 953 F.2d 637 (4th Cir.

1992) (Table).

In C-T, an LBO merger was structured in a similar

manner to the one in the present case. C-T filed suit

against 45 of its shareholders seeking to void the trans-

fers to them as fraudulent conveyances. In rejecting

C-T’s fraudulent conveyance claim and granting sum-

mary judgment in favor of the former shareholders, the

court concluded that C-T received valuable consideration

at law which included an investment of “new capital of

$4 million” and new management. C-T, 762 F.Supp. 678.

This case is distinguishable on its facts. In the Munford

LBO, a jury could find that there was no new capital or

that any new capital received was grossly inadequate.

Further, assuming that new management was to be

provided, it is virtually immeasurable and of relatively

negligible value to the corporation. As such, new man-

agement does not favorably affect or add to the net

worth of the corporation. Even if worth something, such

ephemeral benefits do not constitute valuable consider-

ation. See Richmond Produce, supra, 151 B.R. at 1018;

see also Moody v. Security Pac. Business Credit, Inc.

App. 77

127 B.R. 958, 993 (W.D. Pa. 1991), aff'd, Moody vy.

i ; i , 971 F.2d 1056 (3d

Cir. 1992),

Even if new management could constitute “valuable

consideration,” there is conflicting evidence as to whether

new management served as consideration in connection

with the Munford LBO. Defendant Andrall Pearson

testified that one of the motives for the LBO was to

provide Munford with new management. It is undisputed

that Joseph Leonardo was chosen to run post-acquisition

Munford. In fact, Leonardo was employed and began to

operate Munford in the late summer of 1988, prior to the

closing of the LBO. However, in a letter dated September

26, 1988, Dillard Munford advised Munford’s directors

that Leonardo had agreed to run Munford’s convenience

stores even if the Munford LBO did not close. When

questioned about continued employment, Leonardo tes-

tified that he did not commit one way or the other. This

conflicting evidence establishes a factual dispute from

which a jury could conclude that new Management was

not a valuable consideration for the LBO or that it was

grossly inadequate.

Section 3.1 Merger Price. As of the Effective

Date, by virtue of the Merger and without any

action on the part of any holder of the [Munford]

$1.00 par value common stock or on the part of

[AAC] with regarding to [AMC’s] common stock:

(a) All shares of the [Munford] Common Stock

held as treasury shares by [Munford] or by any

App. 78

wholly owned subsidiary of [Munford] and all

(b) Except as otherwise provided in Section

3.1(a), each share of [Munford] Common Stock

issued and outstanding immediately prior to the

Effective Date shall be converted into the right to

receive a cash payment in an amount equal to

Seventeen Dollars ($17.00) (the “Merger Price”)

[.] (emphasis supplied).

While this section automatically converted Munford

shares to the right to receive a cash payment of $17 per

share, the AMC shares were cancelled and retired for no

consideration. Thus, no funds were paid or to be paid for

the AMC shares of Munford.

Most courts have found that the acquisition or redemp-

tion by a corporation of its own shares gives nothing of

value to the corporation. See Consove v. Cohen (In _re

Roco Corp.), 701 F.2d 978, 982 (1st Cir. 1983); Corporate

Jet Aviation, Inc. v. Vantress (In_re Corporate Jet

Aviation, Inc.), 57 B.R. 195 (Bankr. N.D. Ga. 1986), aff'd,

perme RN ES IR 82 B.R. ere Ga.

al Coatings (In

1s Lasiabais Cheiaee Saat 31 BR 688, 698 (Bankr.

E.D. La. 1983); Flanigan v. De Feo (In re De Feo Fruit

Co., Inc.), 24 B.R. 220, 225 (Bankr. W.D. Mo. 1982); but

see Day v. Central Fidelity Bank, N.A. (In re Appomat-

tox Agri-Service, Inc.), 6 B.C.D. 1239 (Bankr. W.D. Va.

1980). Such returned shares are not assets and do not

add any value or enhancement to the corporation. In the

present case, rather than redeeming the AMC shares in

exchange for cash consideration, they were cancellation

App. 79

and retired for no cash consideration. A jury could find

that such cancellation provided Munford with no consid-

eration or grossly inadequate consideration for the LBO.

Finally, the shareholder defendants contend that Mun-

ford received “valuable consideration” in the form of a

federal income tax benefit of approximately $5.4 million

resulting from a capital loss of $16 million in the World

Bazaar sale. This resulting tax benefit, however, was an

incident of the asset sale and was not a contribution of

capital to Munford.

A jury considering the facts in this case could conclude

that, in the context of a $90 million LBO, the various

items alleged were not a valuable consideration for the

LBO or that they were grossly inadequate consideration.

Accordingly, summary judgment in favor of the share-

holder defendants should be denied on this issue because

genuine issues of material fact exist regarding whether

Munford received “valuable consideration” in connection

with the Munford LBO.

B. “Initial transferee” under 11 U.S.C. § 550

If the Munford LBO is avoidable under § 544(b), sec-

tion 550(a) would permit Munford to recover said trans-

fer from the following:

(1) the initial transferee of such transferee of

such transfer or the entity for whose benefit

such transfer was made; or

(2) any immediate or mediate transferee of such

initial transferee.

11 U.S.C. § 550(a). The shareholder defendants contend

that they were not the “initial transferee” of funds re-

App. 80

ceived in exchange for their shares because Citicorp’s

financing never became property of Munford. The share-

holder defendants assert that AAC was the “initial

transferee” since the funds from Munford’s account were

first transferred to Citizens & Southern Trust, an

account allegedly controlled by AAC. The determination

of whether AAC or Citizens & Southern Trust was a

“transferee” in this transaction depends on whether they

exercised dominion and control over the funds in the

Exchange Agent account or served as mere conduits in

the transaction. See Nordberg v. Societe Generale (In re

Chase & Sanborn Corp.), 848 F.2d 1196, 1200 (11th Cir.

1988); :

838 F.2d 890, 893 (7th Cir. 1988). The conduit issue is

equitable in nature which under Eleventh Circuit prece-

dent requires courts to consider “the entire circumstance”

of the transaction. Chase & Sanborn, 848 F.2d at 1199.

As noted herein, Munford transferred $61,811,235 from

its account at C&S to the Exchange Agent, Citizens &

Southern Trust. These funds were used to purchase the

outstanding common stock of Munford at $17 per share.

There is no evidence that AAC had control or dominion

over the funds in the Citizens & Southern Trust account.

In fact, the Merger Agreement expressly required AAC

and Munford to give Citizens & Southern Trust Ae

irrevocable written instructions to make the cash pay-

ments provided for in Section 3.2(a)... .” (Deposition

Exhibit No. 1, Merger Agreement, section 3.2(b)). Fur-

ther, the funds could only be used for the purpose spe-

cified in the Merger Agreement. Therefore, Citizens &

Southern Trust merely served as a depository and dis-

bursing agent of the funds received from Munford and

disbursed to its former shareholders. Citizens & South-

App. 81

ern Trust and other financial institutions through which

the funds passed are “mere conduits” with regard to the

Munford LBO. The court concludes that the shareholder

defendants are “initial transferees” under § 550(a) and

that summary judgment in favor of the shareholder de-

fendants on this issue should be denied. In view of this

conclusion, the issues raised under § 550(b) are rendered

moot.

C. “Settlement payment” pursuant to 11 U.S.C.

§ 546(e)

The shareholder defendants assert that the payments

received by them in the Munford LBO constitute a “set-

tlement payment” pursuant to § 546(e) and may not be

avoided by Munford. The undisputed facts establish that

Munford shares owned by DFA Entities were tendered to

the paying agent, Citizens & Southern Trust, in ex-

change for cash in the following manner:

DFA Entities’ stock certificates for Munford were

held by the Depository Trust Company (“DTC”).

On December 2, 1988, Morgan Guaranty, in its

role as custodian, directed the DTC to surrender

the shares of Munford held by DFA Entities to

receive payment of $17 per share. By electronic

or physical transfer, the DTC tendered the Mun-

ford shares to Citizens & Southern Trust. That

is, the DTC debited the stocks from its records

and issued a credit to Citizens & Southern Trust.

Simultaneously, Citizens & Southern Trust cred-

ited the DTC with the cash value of the shares

tendered. After the cash value of the Munford

shares was credited to the DTC, the DTC depos-

ited the funds in an account held by Morgan

Guaranty. Upon receipt of the Funds, Morgan

EEE

OOOO

App. 82

Guaranty credited the amounts received to the

appropriate DFA Entities’ accounts.

Likewise, the other shareholder defendants, except Gar-

diner, tendered their shares directly to Citizens &

Southern Trust to receive the cash consideration. (See

Affidavit of Neal Berinhout, J 10, Munford Shareholder

List). The record is unclear as to how Gardiner’s shares

were tendered and the cash consideration paid.

Thus, the question presented is whether § 546(e) pro-

hibits avoidance of these payments. It appears that only

two courts have considered whether payments to benefi-

cial shareholders in an LBO are “settlement payments,”

and they reached opposite conclusions. See Kaiser Steel

Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.),

952 F.2d 1230 (10th Cir. 1991) (“Kaiser II”); Weiboldt

Stores, Inc. v. Schottenstein, 131 B.R. 655 (N.D. III.

1991) (“Weiboldt IT”). Consequently, this court is con-

fronted with conflicting decisions on an issue that

appears to be one of first impression in this circuit.

In Weiboldt II, an Illinois district court examined an

LBO transaction involving a tender offer in which WSI

Acquisition Corporation (“WSI”) acquired Weiboldt

Stores, Inc. (“Weiboldt”). Weiboldt IJ, 131 B.R. at 663.

Harris Trust and Savings Bank (“Harris Bank”) was

appointed by WSI to act as depository and disbursing

agent for its acquisition of all of the issued and outstand-

ing shares of Weiboldt at $13.50 per share. Under WSI’s

tender offer, Weilboldt’s shareholders were instructed to

tender their shares to Harris Bank who was then re-

quired:

to disburse the payments to the tendering share-

holders upon its receipt “of certificates for such

shares, or a timely confirmation of a book entry

App. 83

transfer of such shares into the Depositary’s

account at the [DTC], the Midwest Securities

Transfer Company .. . or [tJhe Pacific Securities

Depository Trust Company ... .”

Id.

That court found that the language of § 546(e) was not

dispositive, and the definition of “settlement payment”

was “circular” and cryptic. Weiboldt I], 131 B.R. at 663.

The court held that:

[a] review of the legislative history of [§] 546(e)

reveals that Congress exempted settlement pay-

ments in the commodities (and later the securi-

ties) industry out of concern that the bankruptcy

of one party in the clearance and settlement

chain could spread to other parties in that chain

. . . [RJequiring the [Weiboldt shareholders] to

return to the [t]rustee payments they received

from WSI through Harris Bank poses no threat

to those in the clearance and settlement chain.

Id. at 664 (footnotes and citations omitted). Based on its

examination of the legislative history, the court conclud-

ed that § 546(e) did not bar the trustee’s claims against

the Weiboldt shareholders. Id. at 665.

Subsequently, in Kaiser IJ, the Tenth Circuit consid-

ered this issue. Kaiser IJ, 952 F.2d at 1235. Pursuant to

a plan of merger, Kaiser Steel Corporation (“Kaiser

Steel”) merged with a new entity formed by a group of

outside investors, with Kaiser Steel emerging as the

surviving entity. Each outstanding share of Kaiser Steel

common stock was then exchanged for $22 and two

shares of preferred stock. The Kaiser II court concluded

that the term “settlement payment” was “extremely

App. 84

broad,” that the LBO payments made to the beneficial

Kaiser Steel shareholders were within its scope, and that

such payments were protected from avoidance under

§ 546 (e).”° Id. at 1237-41. |

The parties have not cited, and the court has not

found, any other cases which have addressed this precise

issue.”” In considering whether the payments to the

shareholder defendants are protected from avoidance, the

*” Prior to Kaiser II, the Tenth Circuit considered whether

payments made to financial intermediaries, such as a stock-

broker, in connection with an LBO transaction are protected

“settlement payments” as defined in § 741(8).

, 913 F.2d 846 (10th Cir. 1990)

(“Kaiser J”). The Tenth Circuit noted that the language was

“somewhat circular” but concluded that such payments are

“settlement payments” and that § 546(e) protected them from

avoidance. Id. at 848-50.

*! However, of the several commentators who have addressed

this conflict, the majority have disagreed with the Kaiser

analysis. See Neil M. Garfinkel, Note, No Way Out: Section

LBO, 1991 Colum. Bus. L. Rev. 51 (1991); Gerald K. Smith

and Frank R. Kennedy,

, 43 South Carolina L. Rev. 709

(1992); William C. Rand, eh

orm Of An LBO Payment?, 19

lent Conveyance Made In The

Fordham Urb. L. J. 87 (1991); Jane Elizabeth Kiker, Judicial

Charles Schwab & Co...913 F.2d 846 (10th Cir 1990)" 1

Hamline L. Rev. 453 (1991); but see Michael Cook, Brad 7.

Axelrod, and Geoffrey S. Frankel,

iabili , 43 South

Carolina L. Rev. 777 (1992). They contend that § '546(e) was

not intended to protect such LBO consideration payments form

avoidance.

App. 85

court must determine the meaning and scope of the term

“settlement payment” as defined in § 741(8). Statutory

construction wae age ~—— with the oe of a

statute. See Be

mank Cis 6 eas te, & Lee Daa. 878 F. 2d 742,

749-50 (3d Cir. 1989) (quoting Mansell v. Mansell, 490

U.S. 581 (1989)). Nevertheless, in construing a particular

statute, a court is “‘not . . . guided by a single sentence

or member of a sentence, but [should] look to the provi-

sions of the whole law, and to its object and policy.’”

Bevill, 878 F.2d at 750 (quoting Massachusetts v.

Morash, 490 U.S. 107, 115 (1989)). Further, as instructed

by the Eleventh Circuit, “[i]t is especially important to

consider the goal of a iaw, and the effect of a particular

ruling, in areas of law as bankruptcy jurisdiction that

are so strongly rooted in equitable principles.” Chase &

Sanborn, supra, 848 F.2d at 1202; see also Bank of

Marin v. England, 385 U.S. 99, 103 (1966).

Section 546(e) provides in pertinent part that:

. the trustee may not avoid a transfer that is

a margin payment, as defined in section 101(34)

[sic (38)], 741(5), or 761(15) of this title, or settle-

ment payment, as defined in section 101(35) [sic

(39)] or 741(8) of this title, made by or to a com-

modity broker, forward contract merchant, stock-

broker, financial institution, or securities clearing

agency, that is made before the commencement

of this case, except under section 548(a)(1) of this

title.

11 U.S.C. § 546(e). The term “settlement payment” is de-

fined in § 741(8), asa

preliminary settlement payment, a partial settle-

ment payment, an interim settlement payment,

App. 86

a settlement payment on account, a final settle-

ment account, or any other similar payment com-

monly used in the securities trade.””

11 U.S.C. § 741 (8).

This court agrees with the several courts that have

found the definition of “settlement payment” to be cir-

cular or facially ambiguous. See Bevill, 878 F.2d at 751;

Kaiser I, 913 F.2d at 848; Weiboldt II, 131 B.R. at 663.7

To ascertain the meaning and scope of the term as used

in §§ 546 (e) and 741(8), it becomes necessary therefore

to analyze the legislative history. See Blum v. Stenson,

465 U.S. 886, 896 (1984); Bevill, 878 F.2d at 751; Wei-

boldt II, 131 B.R. at 663.

At the outset, the court is confronted with two conflict-

ing legislative policies. The court must either harmonize

these policies or determine which policy Congress in-

tended to prevail. On the one hand, the Code grants

trustees broad power to avoid fraudulent transfers. Such

power serves to protect the interests of creditors by

permitting recovery of assets transferred by means of

actual or constructive fraud. On the other hand, when

Congress amended the Code in 1982, it expressed a

policy in § 546(e) to limit the trustee’s power to avoid a

transfer that is a margin or settlement payment except

* Section 101(39) also provides a definition for “settlement

payment” which applies only to forward contracts. See 11

U.S.C. § 101(39).

*8 But see Kaiser II, 952, F.2d at 1237 (the Kaiser II court

appears to have ignored its earlier finding in Kaiser ] that the

definition of “settlement payment” in § 741(8) is “somewhat

circular” in concluding that the statute should be applied

based on its plain meaning); i

(In re Comark), 971 F.2d 322, 325 (9th Cir. 1992).

App. 87

in cases of actual fraud. See H.R. Rep. No. 420, 97th

Cong., 2d Sess. 2 (1982), reprinted in 1982 U.S. Code

Cong. & Admin. News, p. 583 (“1982 House Report”).

The legislative history of former § 764(c) indicates that

Congress’ intent was to insulate “. . . margin payments

and other deposits from the evolding powers except to

or extent of actual fraud. CREST

H. R. ve No. 595, 95th Cong., 2a an 92 (1978), re-

printed in 1978 U.S. Code Cong. & Admin. News, p. 6348

(emphasis supplied). Likewise, the 1982 amendments

were intended “to clarify and in some [but not all]

instances, broaden the commodities market protections

and expressly extend similar protections to the securities

market.” 1982 House Report at 583 and 587 (emphasis

supplied). Section 546(e) replaced and incorporated the

provisions of former § 764(c). As part of its clarifying

changes, Congress enacted § 741(5) and (8) to define

“margin-payment” and “settlement payment,” respective-

ly. It is reasonable to conclude, therefore, that Congress

intended § 546(e) to extend the same “ordinary course of

business” protections accorded the commodities industry

to the securities industry. See 4 Collier on Bankruptcy,

q 546.05 (15th ed. 1990).

The parties have cited no securities industry defini-

tions of “settlement payment” other than those consid-

ered by the Bevill and Kaiser courts. From the court’s

* But see Kaiser I, 913, F.2d at 849. The Tenth Circuit con-

cluded that the 1982 amendments expanded the market pro-

tections “beyond the ordinary course of business to include

margin and settlement payments to and from brokers, clearing

organizations, and financial institutions.” Id.

App. 88

review of these definitions, it is apparent that they

contemplate securities transactions “in the ordinary

course of business” in the securities market. The various

securities industry definitions generally refer to the

completion of a securities transaction or group or trans-

actions. See Kaiser II, 952 F.2d at 1238; Kaiser I, 913

F.2d at 849.

None of these definitions expressly apply the term

“settlement” or “settlement payment” to payments made

in connection with the mandatory tendering or redemp-

tion of stock in an LBO transaction. Even in Kaiser I

and Kaiser II, the Tenth Circuit recognized that an LBO

transaction is not a routine securities’ transaction.

Further, such transaction is not one which occurs in the

ordinary course of business of a stockbroker or any other

participant in the clearance and settlement chain. These

definitions, therefore are consistent with the “ordinary

course of business” limitation of former § 764(c) as in-

corporated into § 546 (e). The legislative history clearly

indicates that both former § 764(c) and § 546(e) were

intended to prevent the insolvency of one commodity or

security firm from spreading to other firms and possibly

resulting in the collapse of the affected market. See 1982

House Report at 583-84. This court is of the view that

the Kaiser II court painted with too broad a brush. In

that case, the court itself recognized that such conclusion

was “not without merit” and that its holding was “broad

in its application.” See Kaiser II, 952 F.2d at 1239, 1241

(quoting Kaiser I, 913 F.2d at 850). The court concludes,

therefore, that § 546(e) was intended to protect from

avoidance ordinary course of business transactions by

participants in the clearance and settlement chain of the

commodities and securities market.

App. 89

In the present case, the Munford LBO undoubtedly

was a securities transaction. The former shareholders

effectively sold their equity interest in Munford in ex-

change for cash consideration. In settlement of the trans-

action, they tendered their shares and received pay-

ments. Nevertheless, this was essentially a private trans-

action between Munford and its shareholders. The public

market for buying and selling securities was not mean-

ingfully implicated. The clearance and settlement system

was involved only to the extent that DFA Entities used

financial intermediaries to hold its Munford stock. In

that instance, the system was merely used as a conve-

nient conduit to surrender their shares and obtain

payment of the LBO consideration. The clearance and

settlement system was bypassed altogether by the other

shareholder defendants since they tendered their shares

directly to Citizens & Southern Trust. Although Citizens

& Southern Trust is a financial institution, it was not

acting in this LBO transaction as a participant in the

clearance and settlement system as contemplated by

§ 546(e). Permitting recovery from the shareholder defen-

dants will not threaten the system or any of the institu-

tions within the clearance and settlement chain. See

Weiboldt II, 131 B.R. at 664-65.

Moreover, there is no manifest Congressional intention

to protect LBO consideration payments from avoidance.

In contrast, Congress has expressly manifested an intent

to protect payments made in connection with repurchase

agreements by enacting § 546(f). Both the Third Circuit

and the Ninth Circuit have concluded that the transfer

of securities in connection with a repurchase agreement

are protected “settlement payments.” See Jonas v. Reso-

App. 90

lution Trust Corp., (In_re Comark), 971 F.2d 322, 325

(9th Cir. 1992); Bevill, 878 F.2d at 743.

In Comark, the Ninth Circuit applied § 546(e) and the

definition of “settlement payment” in § 741(8) to the

“repo transaction.” Comark, 971 F.2d at 325. The court

notes, however, that Comark was decided after § 546(f)

was added to the Code but before its effective date. The

Bevill court’s conclusion was predicated on the term

“settlement payment” as presented in § 546(f), not

§ 546(e). In both cases, the courts examined the repo

market and determined that it was a huge market

serving several important roles in the nation’s economy.

Comark, 971 F.2d at 325; Bevill, 878 F.2d at 745. For

example, “[t]he repo market is used by the Federal

Reserve System to help execute monetary policy, and

serves to finance the national debt at the lowest possible

cost.” Bevill. at 745. As such, repo transactions are

ordinary course of business transactions, which fully im-

plicate the clearance and settlement system that Con-

gress intended to protect.

In this court’s view, the conflicting legislative policies

noted above can be effectively harmonized. Generally,

equity shareholder interests are subordinate to creditor

interests. See Robinson v. Wangeman, 75 F.2d 756, 757

(5th Cir. 1935). This traditional right of creditors to be

paid before shareholders in a bankruptcy case is pre-

served by the avoidance of fraudulent conveyances.

Where the elements of a constructive fraudulent convey-

ance are satisfied, avoidance of LBO payments to

shareholders does not meaningfully conflict with Con-

gress’ fundamental intent to protect the participants in

the securities clearance and settlement system. Such an

interpretation of § 546(e) furthers the goal of protecting

ee TaN

App. 91

the priority of creditor interests over those of equity

security holders where a constructive fraudulent convey-

ance has occurred. At the same time, “ordinary course of

business” security transactions in the public market are

protected.

Based on the foregoing reasoning, this court agrees

with Weiboldt IT and concludes that § 546(e) does not

prohibit avoidance of payments made to the shareholder

defendants. Therefore, the shareholder defendants are

not entitled to summary judgment as a matter of law.

IT. Count V

Defendant Dillard Munford entered into an employ-

ment contract with Munford which originally provided

for termination payments equal to five years of his base

salary if he were involuntarily terminated or suffered a

substantial decrease in his responsibilities. Similarly,

defendants Fellows and Carroll entered into employment

contracts with Munford which originally provided for

termination payments over a three year period equal to

their base salary at the time of termination. Modifica-

tions to each of the agreements were approved by the

board of directors to provide that the severance provi-

sions would become operative upon the closing of the

Munford LBO.”*

*° Under the modified agreements, the final compensation for

these officers upon termination was as follow: (1) $1,837,500

to Dillard Munford over a period of five years; (2) $720,000 to

Mr. Fellows over a period of three years; and (3) $480,000 to

Mr. Carroll over a period of three years. (See Deposition Ex-

hibit No. 1, LBO Proxy Statement, p. 26-27).

App. 92

Citing International Ins. Co. v. Johns, 874 F.2d 1447

(11th Cir. 1989), the officer defendants contend that

“golden parachutes,” or severance agreements, must be

evaluated under the business judgment rule. This rule

protects a board of director’s decision regarding sever-

ance agreements unless they constitute corporate waste.

Id. at 1461. The Eleventh Circuit has instructed that

courts should not invalidate a severance agreement so

long as the compensation received by the departing

officer “. . . bares a reasonable relationship to the

services rendered.” Id. “Corporate waste exists when the

payment is afforded without ‘adequate’ consideration.”

Id.

Munford, however, does not assert that the severance

payments received by the officer defendants constitute

corporate waste in violation of the business judgment

rule. Instead, Munford asserts that such payments to the

officer defendants constitute fraudulent conveyances in

violation of O.C.G.A. § 18-2-22(3). As noted above, the

parties have stipulated that genuine issues of material

fact exist regarding whether Munford was rendered

insolvent by the LBO transaction.

Nevertheless, the officer defendants assert that sum-

mary judgment is appropriate because the severance

agreements were supported by “valuable consideration.”

See Stokes, supra, 247 Ga. at 659. They contend that the

modified severance agreements were executed to induce

the officer defendants to remain through the consumma-

tion of the Munford LBO and that their continued

performance constituted “valuable consideration.” Mun-

ford contends, however, that the purported consideration

was a “sham.”

App. 93

All of the parties cite Royal Crown Cos., Inc. v.

McMahon, 183 Ga. App. 543, 359 S.E.2d 379 (1987),

which analyzed whether a written severance agreement

with McMahon was void as being without consideration.

The agreement expressly provided certain severance pay

and benefits as an inducement for and in consideration

of McMahon’s continued employment. Id. at 544. The

Georgia Supreme Court concluded that such agreement

was offered expressly to induce McMahon to remain in

his position during merger negotiations and that contin-

ued performance under a terminable-at-will contract was

sufficient consideration. Id. at 545.

The officer defendants’ modified severance agreements

contain no such language. Nothing in the modifications

even suggest that they were to serve as an inducement

for continued employment until consummation of the

LBO. Further, Dillard Munford testified that he did not

need an enhancement package of severance benefits to

stay with Munford until closing. (Deposition of Dillard

Munford, p. 98). Fellows and Carroll testified that they

had no plans to leave prior to the LBO; (Deposition of

Russell Fellows, p. 66; Deposition of James Carroll, p.

96-97). Further, Rymer testified that the modifications

were based on the past services and the offer of a

monetary incentive to stay was never a consideration or

concern. (Deposition of $.B. Rymer, Jr., p. 159-160).

A jury considering the evidence could conclude that

there was no consideration for the payments received

pursuant to the modified severance agreements and that

such payments were mere “gifts” without valuable con-

sideration. Thus, the court concludes that genuine issues

of material fact exist with regard to whether Munford

received “valuable consideration” in exchange for any

App. 94

payments made pursuant to the modified severance

agreements. Accordingly, summary judgment in favor of

the officer defendants regarding Count V should be

denied.

Il. COUNTS II AND IV

In Counts II and IV, Munford asserts that defendants

Dillard Munford, Fellows, Carroll, Blount, Dickson, Fer-

guson, Gardiner, LeBlond, Pearson, and Rymer, Jr. (col-

lectively the “officer and director defendants”), breached

their fiduciary duty to Munford and negligently misman-

aged and wasted its assets. The officer and directory

defendants cite Bangor Punta Operations, Inc. v. Bangor

& Aroostook R.R. Co., 417 U.S. 703 (1974), to support

their contention that Munford is estopped from pursuing

these claims.

In that case, the complaining shareholder acquired the

majority of its shares well after the alleged wrongs were

said to occur. That case is factually distinguishable from

the present case. Here, all allegations of mismanagement

and breach of fiduciary duties are based on the actions

of the officer and director defendants in connection with

the Munford LBO and their effects on the corporation.

The equitable principals enunciated in Bangor Punta

neither apply nor preclude Munford from prosecuting its

claims against the officer and director defendants on

behalf of its creditors and its estate. See Weiboldt I,

supra, 94 B.R. at 507-09.

*° In Weiboldt I, which involved an LBO transaction, the IIli-

nois district court found that such principals enunciated in

(continued...)

App. 95

Next, Munford contends that these defendants

breached their duties in approving and effecting the

Munford LBO by failing to consider the interests of any

corporate constituents other than the former sharehold-

ers. The officer and director defendants contend, howev-

er, that their only obligation under the circumstances

was to “maximize shareholder value.” They further con-

tend that their decisions and actions with regard to the

Munford LBO are protected under the business judgment

rule.

Generally, the business judgment rule creates “.. . a

presumption that in making a business decision the

directors of a corporation acted on an informed basis, in

good faith and in the honest belief that the action taken

was in the best interests of the company.” Aronson v.

Lewis, 473 A.2d 805, 812 (Del. 1984). Under Georgia

law, a director must discharge his duties in good faith

and with the care of an ordinary and prudent person

under similar circumstances. O.C.G.A. § 14-2-152.1(a)(1)

(1982).?”

In discharging his duties, a director is entitled to

rely on information, opinions, reports, or state-

ments, including financial statements and other

26 (...continued)

Bangor Punta precluded Weiboldt from pursuing its claims

against the directors on behalf of itself. Weiboldt I, 94 B.R. at

508. The court concluded, however, that such action could be

maintained on behalf of its creditors who suffered a direct

injury as a result of the directors’ wrongdoing. Id.

27 Although O.C.G.A. § 14-2-152.1 was superseded by 0.C.G.A.

§ 14-2-830 on July 1, 1989, the former provision was in effect

at all times relevant herein and is controlling authority in this

action.

App. 96

financial data, if prepared or presented by: (B)

... public accountants, investment bankers, or

other persons as to matters the director reason-

ably believes are within the person’s professional

or expert competence... .

0.C.G.A. § 14-2-152.1(a)(2) (1982). The business judg-

ment rule protects directors unless there has been a

clear showing of “. . . fraud, bad faith or abuse of discre-

tion.” Cottle v. Storer Communication, Inc., 849 F.2d

570, 575 (11th Cir. 1988).

“It is settled law that corporate officers and directors

occupy a fiduciary relationship to the corporation and its

shareholders, and are held to the standard of utmost

good faith and loyalty.” Quinn, supra, 254 Ga. at 217

(citing King Mfg. Co. v. Clay, 216 Ga. 581, 118 S.E.2d

581 (1961)). Munford argues that the officer and director

defendants owed an obligation or duty to creditors in

connection with the Munford LBO. In McEwen v. Kelly,

140 Ga. 720, 79 S.E. 777 (1911), the Georgia Supreme

Court stated that:

liJn a solvent, going concern, directors are the

agents or fiduciaries of the corporation, not of its

creditors. But directors are not wholly without

duties to creditors. They can not [sic] misappro-

priate the corporate assets, or give them away, sO

that creditors are prevented from collecting their

debts; and under some circumstances a trust or

quasi trust relationship exists toward creditors.

Id. at 724. All parties acknowledge that officers and

directors owe a duty to creditors after a corporation

becomes insolvent. See Fountain v. Burke, 160 Ga. App.

262, 263-64, 287 S.E. 2d 39 (1981); Ware v. Rankin, 97

Ga. App. 837, 838-39, 104 S.E.2d 555 (19

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