A bankruptcy complaint accuses
Indeed, other firms also may be skating close to the edge as their investments struggle in a sluggish economy. In one case, Chicago buyout shops
Such court fights are likely to increase, as companies that failed during the Great Recession work their way through bankruptcy, leaving trustees, creditors and debtors themselves looking for ways to recoup their losses, said Victor Milione, the leader the bankruptcy practice at the Boston-based law firm Nixon Peabody LLP. “We’re seeing more of these,” Milione told Buyouts. “We’re probably at the beginning of the cycle.”
In the Sun Capital case, bankruptcy trustee George L. Miller filed an adversary proceeding last month in Delaware, accusing the Boca Raton buyout shop of fraud for its treatment of the company formerly known as Indalex Inc., an aluminum extrusion company in Lincolnshire, Ill.
Sun Capital acquired Indalex, the No. 2 company in its market, in 2005 from Honeywell for $425 million. But as its business slowed in the housing and automotive markets as the result of a falling economy, Indalex filed in March 2009 for Chapter 11 protection. The court approved the sale of its operating businesses, and what is left of Indalex is now in Chapter 7 liquidation.
In his 51-page complaint, the trustee accused Sun Capital of taking “a series of exorbitant distributions and payments” that left Indalex insolvent and unable to pay its debts. Miller tallied more than $85 million in dividends and management fees that he asked the court to require Sun Capital to pay to other creditors. “Lawsuits related to bankruptcies are quite common,” a spokesperson for Sun Capital said in an e-mail message. “As a policy, we don’t comment on legal proceedings and prefer to deal with specific allegations in court. However, we can say that we will defend our position vigorously.”
In the case involving GTCR Golder Rauner and Madison Dearborn, the two sponsors took a $180 million dividend recapitalization in January from portfolio company Sorenson Communications, the nation’s largest provider of video relay services, which allow the hearing impaired to make video phone calls using sign language and an interpreter.
Sorenson’s services are paid for not by the users but through a fund that phone companies pay into and whose rates are ultimately set by the Federal Communications Commission. In April, an advisory group recommended slashing Sorenson’s reimbursement rate to $3.89 per minute from its previous $6.24. Communications Daily, a telecom trade journal, reported in June that Sorenson had threatened to cut jobs or even enter bankruptcy if the FCC adopted that rate.
By the end of June, the FCC adopted a rate of $5.07. Sorenson pronounced itself “disappointed,” saying in a statement on its Web site, “In light of the FCC’s reduced rate, Sorenson anticipates having to make certain operational changes and cost reductions. However, Sorenson intends to do everything possible to minimize the impact of reduced service levels to VRS consumers.”
Sorenson did not respond to requests for comment.
Although the company appeared to take the bankruptcy threat off the table, the episode still could have repercussions for the sponsors, perhaps especially for GTCR Golder Rauner, which reportedly has begun marketing its $3 billion tenth fund, as Bruce Rauner, the firm’s chairman, scales back his involvement. The Chicago-based private equity firm’s prior fund was capped at $2.75 billion in 2006.
GTCR Golder Rauner did not respond by deadline to a request for comment. A spokesman for Madison Dearborn declined comment.
Appeals courts have split over the degree of duty that buyout firms owe to creditors and other investors in portfolio companies, and over the role of third parties in delivering solvency opinions “relying on information given by conflicted directors,” said Milione of Nixon Peabody. “That’s going to be a growing area of litigation over the next couple of years.”