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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1998

## Text

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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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 man

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1491%3A2. Public record. Not legal advice.