Court Backs Subpoenas of Castle Harlan Over Quick Flip

The battle over perhaps the quickest private equity “quick flip” in history has edged closer to a lawsuit.

A federal court on Nov. 17 denied a motion by Castle Harlan Inc. to toss subpoenas that seek documents regarding the firm’s rapid acquisition and sale in July of Norcast Wear Solutions.

On July 6, Castle Harlan bought the Toronto-based supplier of mill liners and other products to the mining industry from Pala Investments for $190 million; within seven hours, it had sold it to Bradken Ltd, an Australian competitor of Norcast’s that has a long history with Castle Harlan, for $217 million.

The subpoenas had been granted to Norcast S.ar.L., the former owner of Norcast Wear Solutions and a wholly owned subsidiary of Pala. Norcast and Pala maintain that Bradken was a “potential buyer” in the initial transaction that “expressed no interest,” according to the Nov. 17 ruling by U.S. District Judge Paul A. Crotty in the United States District Court for the Southern District of New York.

Norcast believes that Castle Harlan’s rapid sale of the company to Bradken “suggests an improper relationship” between Castle Harlan and Bradken under Australian law. Now Castle Harlan will have to provide e-mails, internal memoranda and other communications regarding the acquisition and sale of the company.

“Had Norcast known it was dealing with Bradken, its competitor, it would have insisted on a higher price and different terms, but Bradken used Castle Harlan as a ‘stalking horse,’ or a ‘strawman,'” states the background section of the Nov. 17 ruling.

No formal litigation has begun, but Norcast is seeking documents regarding the deals as part of pre-litigation discovery in support of potential legal action in Australia, according to the Nov. 17 ruling.

The judge upheld the subpoenas, originally issued July 20 by the same court, with some modifications. While denying Castle Harlan’s motion to quash the subpoenas, he granted Castle Harlan motions that its executives not have to give oral testimony. Norcast specifically wanted testimony from Howard Morgan, co-president of Castle Harlan.

“At this stage, while the proceedings in Australia are far enough along to justify document discovery, there is much work to be done by way of document discovery before deposition testimony is appropriate,” Crotty wrote in his opinion.

Crotty also placed some limitations on the discovery request, stipulating that “no privileged materials need be provided” by Castle Harlan. Privileged materials usually pertain to communications exclusively made between a client and its attorneys protected by the attorney-client privilege.

Representatives for Castle Harlan, were not immediately available for comment. The firm previously vowed to “vigorously defend any action taken against us,” as Buyouts previously reported.

Castle Harlan and Bradken have had a decade-long relationship. CHAMP Private Equity, Castle Harlan’s Australian affiliate, bought Bradken in 2001 for $94.2 million and took it public in 2004, as Buyouts previously reported.

In 2006, Castle Harlan bought AmeriCast Technologies, a designer and manufacturer of steel castings, for $110 million, with Bradken taking a 19 percent minority stake. Less than two years later, Bradken bought the company for $288 million. The firm earned about 3x its investment in AmeriCast, according to a 2010 Buyouts profile of Castle Harlan.