Amended 2255 Motion 5-8
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- Pages: 126
'",
NO. ~~STRONG,
CCNNIE C.
§ §
and ~n the Riqhc Of ~PPJVl~, r~c" and PJL~ILTON-TAf~ & :~dividual~v,
a~
Lease
Febr~ary
S 9,
1989, as Q 5hareholde~ in y-~ P HA.RJ.4_~ , 1: ~lC . ,
?laint::fs,
v. ~_~_XP?-AR..I..(_~,
INC.;
&
CHRISTIANA
C~~ANY;
l-iA:~!:..r8N-7MT
C8RPORATION; :r! S ION KEYSTONE F INANC :.;L C:RPORATIONi CR ACCU:SIT:ONS, E~IERGY
I
L~C.; LAwRENCE 8" C:S~~LLai C. ~AYNE Lr~C~FIELD; ?£G~Y f. CA:T£1L; TI~OTHY w. =EL~;
A.
F~DrD;
CR. ?5.
~~~SAD; and JOHN H. ~CeERTS, e~c~ respec~~vely CCt~ i~=ividual!y
JR.;
and as
of ~~~?~~~~, :~:C., ana ce:.-ivac':'":el.y therefrom ~~c as d result of :~2 cant=ol
S~~==hclde=s
~~=~=ot,
c~nc=~ll~~~
:harehalders
& C:.,
~:
~~~!:~ON-TAFT
dC,
lease Febr"..lary 9,
U.s. v ARMSTRONG CR94-0276 _ CAL '
chr~ugn
:989
FOWLES
GOVERNMENT EXHIBIT
S
elC. i
~C~JLv~Q
IN THE DISTRICT COURT
§ § § § § § § § § § § § §
CC~ANY,
~~=cugh
/ ....,
161
JUDICIAL DISTRICT
§ § § § § § § § §
S S § § §
S
Defendants.
§
DA.L.:.-;S COUNTY, TEXAS
-
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST T~ORARY
~c
T~£
HONORABLE JUCGZ OF SAID COURT:
COM.ES and
NOW,
che
in I
t.;;==u.gh
at.
CCNN r E C.
=ight. leas~
;::E
ARMSTRONG
~.AXPH...~R.!-'..A,
:ebruary
9,
( .. A.R-'!STRONG - ),
INC. 1989,
and and
Indi v iduall y
HAMILTON-TAFT as
APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PE~~ENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
&
Shareholder
PLAINTIFFS' ORIGINAL PETITION,
T~~ORARY
Page 1
CO. of
INC;. ,
~!AXPHAR~,
Pet.~tion,
Applicat.ion
the
for
for
Cour~
and
Temporary
ImposiT:ion
in
and
("ARMSTRONG"),
Application for Temporarj
Applicat:ion
shc~s
?laint.iff
for
Res~raining
Order, Ex
Permanent.
rnjunct.ion,
Const:=uc~ive Trust.,
of
Original Par~e,
and
respeccfully
t.hereof as follows:
suppor~
I .
PARTIes 1.
,A.R..~STRCUG,
?laint.:'::,
cr >!..;X;:i.A.R.'-!A,
LAWRENCE Da~las
indivicual resid:ng in President. of
her e i:l by s e !:"v in g h i
:: 2 : -2
d
n c: a. r. ': ,
·::':'=ec,;;::-
2r
C=e5cen~
him dt:
~:1
Courc,
~lcce
be
of
business
~e~Jed
an
10 cat 2 d
INC.,
may
':'n
and
a
ser'.red
place
( .. LITCHF ! :: L => " ),
in Dallas, his
member of
it.s
process
;..rith
business,
of
:.. 5
an
Board of herein
located
dt:
by
200
Texas 75201.
ROBER.7:S,
Dallas
dt
be
~allas,
:OHN
with process
L : T c: :::: :: =: :. J
Oklahcrna City, Ckl.ahcma, and is c:l===ntly
Suite 1300,
residing
is
his p r inc i ? a 1 ? 1 ace a f bus in e s s
COSTE~~O
~rincipal
Detendan~,
irlcivicual
t
pr~cess
:!..AX?:t.ARl'A..A,
his
("COSTELLO")
Caunt.y, Texas, and is current.ly the
~'\j' AY~ IE
C.
LITC~:~£LD
ser:ir.g
COSTELLO
Suite 1300, Dallas, Texas 75201.
Ccu=~,
:-esid':'~.g
l.:-,,::':".":';:uc2.
at
1T1
B.
may be served wit.h
INC.
~~XP~~~~~,
dt. 200 C=escent
indi'/idual and shareholder
an
residing in Dallas C:Junt:y, Texas.
INC.,
DeEendant,
2.
is
County, Dallas
JR.
':'exas,
County,
princi~al
("ROBERTS"),
wit.h his Texas.
is
an
principal
ROBERTS
may
place of business at 200
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 2
Cour~1
C.=escen':. d~
<0=
his
mat.e!"ial
herei.n,
~cre
has
deSl';:1dt.ed
1:1 -:!".i s
3737
engaged
Pot.omac,
Dallas,
HADrD
("HADIO·),
cause.
en:.e=ed
in
Dallas
t.imes
HAOID does nat. maint.ain a
c.:..:.e
Fe=::.::n
'",ho
is
note
:::-::;s
::as
over
C:::-'.:'=:Jl
mc='i.:~c=.tions
d
Nat.ional
:.ne
=-=-:.~.!:::'CN-TAf:'
.::::nt.i:1ui:-.g by
(d)
=esident. of
by
~ot.e
now
::::a=:.
0f
Stat.e of Texas.
the
HADID
while
due
and
in
in
Callas,
payable
the ::a5 is c
=
because
Texas
breach of his dut.y to
the
lending
t.he
che
Dallas
~ay
(b)
~ashing-r.:Jn,
in
~A..AXPP..A.R..\(.A.
Secrec.,ary of
the p=omissory
P-ADID
effecr.uat.ion
of
,UNDS
P.S.
having as
a
Texas
EJRASAD
received =esu I t o E
Acc~rdingly, ~ID
may be
provi.ded
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION
TEMPORARY RESTRAINING ORDER,
FOR TEMPORARY AND PERMANENT INJUNCTION, AND kPPLlCATION FOR IMPOSITION OP CONSTRUCTIVE TROST
a of
as ;.Jell as
of
is
ROEER.TS
ty
bet.·",een DR.
Stat.e
Da.llas
:.he causes c:: act. ien
through
n.CCOUNT
P..ADID
Ccunt.y,
in Dallas,
acquisit.ion
agreement.s
C8NCENTRATION
inter-est.
s.;!!:":i.ng
PRASAD,
Sank of
c.:.
&
facili.cated
?S.
JR.
co
and
herein arose from or are connect.ed
ccmmi:.:.ed
~D:Q'S
':'=x~s.
·.... ne['.
C':':'E:S
a.ll
at.
:n addition,
:-.':'5
Count.y,
in the Stat.e of Texas,
business
a
not.
t=r::missory
~:-'d':.
and
I
is
asser~ad
ac:.£
a
int.:J
C:::":':-'.:.y,
a:1c-
75201,
Texas
agent: on ...... hom service of cit.at.ion may be made
!'I_""DID
?u~~osei!Jl
',.;i:.::
A.
described below.
causes of ac-::cn
::: ':.=
at:
Dallas Count.y,
place of business or residence in the Stat.e of Texas,
:;'0
Texas
Dallas,
1
~OH~\f.ED
par~icularly
~eqular
T~e
=esidence
Defendant,
5.
has
13i'5
75205>.
T2xas
as
Sui~e
Page 3
t.ha.t.
t.r.e
cication
addres s
at
6.
1300
!?et.ic.ion N.
Defendant.,
hereto
material Beard.
anQ
of
and
17th
DR.
cic.ation dsser~ed
dC~S
be
:nay
through
his
~.AXPHARMA
~n
below.
made
in
by PRASAD
original
basis
conduct
may
~=:::'lided
ce~~ified
~?H..A.RJ-f.A,
be
place
Fifch
times
all
the
material
Texas /
not. mainr.ain
as more a
place
cause.
causes
The
in
assist-ing
':.0
the
cause
asset.s
of
aC't.ion
c.he purposeful·
he has
facilitaced ~o
ROBERTS
t.o acquire
acquire
~~~ILTON-
fV.}!ILTON-T.~fT/
ant
exerc:'se in good fait.h and ·.... l:.~ due of
duc.ies
as
~hich
of
more of
direct-or
a
con't.rolling
and
fully descr.:.bed
below
According 1 Y ,
action.
is
che
De f e ndan t.
cited by serving t.he Secret:ary of State of Texas
that. the
p=:. .... ci.;;al
(Jest.
fiducia.ry
Plaintiff's
of
PR.ASAD,
400
of
at
in Texas because (a)
subsequenr. :ailure
shareholder
and,
a cor?orac.e shell through
c.he
Virginia
was a t a l l cimes
J
from or dre connect:ed with
::-.erea::er dissipace
di':"':"gence
Rosslyn,
in Dallas County,
chis
:'.~_::'
t~E
office
home
Texas and has no agent. on whom service of
as
(t: \
HADIO'S
1100,
PRASAD does
~~~p~~~~~
=.r.c'
Suite
too
PRASAD ( .. PRASAD" )
in bus iness
herein arese
comrnit~ed
Streec,
P. S.
of
par~ic~larly desc=~bed
of =egular business
for..;arded
is believed t.o cur:=ent:ly be a member of
Direccors
here in / has engaged
dre
ci~at:ion
of
and pet.i:.ion are forwarded co PRASAD' 5
business,
Street.,
KEYSTONE
Greenville,
FINANCIAL
Nort.h
CORPORATION,
Carolina
27834,
mail, return receipt. requesr.ed.
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 4
by
Defenda.nt:,
7. indi v idual
wit:h
res iding
cit.at.ion
8.
Count:y I
Dallas
her principal
a.t.
Defendant,
ccr;o=at.icn duly
is
("CATTELL"},
Texas
a.nd may be
I
place of business,
of
':'axas,
regi.s~c:!:'ed
MAXFHARMA,
fo~ed
and
Tennessee
Stat.e
in
CATTELL
f.
200
an
served
Crescent:
Suit.e 1375, Dallas, Dallas County, Texas iSlOt.
Cour~,
of
PEGGY
is
a
and existing under t.he laws of t.he Stace
duly
au'thorized
and . may be
aqent:,
{"MAXPHARMA"},
INC.
i:..,.;WRENCE
t:o
t=ansact
business
served '''/it.h cit.at:ic:l by 3.
COST::UO,
at
200
in
t.he
serring it.s
Crescenc
Cour1:,
Suit.e :300, Jallas, Dallas Count.y, Texas 75201.
i.s
d
&
("H.A..'1ILTON-TAFT"),
CO}!FANY
c:::-::orat.ion duly for:ned and exist:.inq under ehe
at
Stat.e he=e!..;., ~;e~~
HA.."1IL:'ON-TAFT
Deiendant.,
9,
Calif:rnla.
has
~~
engaged
::use. ~:'''':·::::':~i-:.;.r!,
=y
fJ_~~! :':CN-:'AFT
e:e!'::: =::lance
The
arose
business
from
engaged
wi 'th
:·..1r~her,
~as,
~::~ized by ~~ans
causes of or
HAMI LTON -TAFT
ar.c.
i:1s.:.':e=
in
in
at:
Texas
0.1:"
t.imes
l':as
and
no
of t.he
mdt-erial
des ic;nat:ed
Scace cf Texas an whcm service Cl:at.lon may be made
:~e
c ~;n~.:. ~ ~ ad
HA~ILTON-TAFT,
~aws
in
res pec t:
because
are
acr.ion
assert:ed
ccnnecr:ed ·,..rith
in
Texa s
becd us e
loan t.ransact:ion, 'Co
which
·,..,as
herei:1
a<;alns't
t=urposei:Jl
acts
:-tAXP HARMA
and
through nominees,
the
due,
in
P..A..'1IL:'ON-TA.FT permit.:.ed
part:,
lese1 f
in
t.::l
Texas;
be,
and
ROBERTS and COSTELLO as a vehicle for f~nding of
may be cit-ed by serving che Secret.ary of State of
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR Tf~ORARY
RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 5
,
•• w
......--
Texas
prav ided
cha e
regiseered
HA."!ILTON-TAFT'S ~~ay,
Albert: L. 9~102, by
and
agen-c
peei tion
in
the
567 Golden Ga'Ce Avenue,
Defendanc,
fo~ed
VISION,
at
~exas,
California,
or
is
("VISrON")
INC.
a corporation
Cert.~ficate
or
fram the Secretary
Au~hority
t~ansact
business in the
and may be served with citat.ion in this action by
ciCct:on upon its
~eg:stered
its
of
to
San Franc isca, Cali farnia
c: State c: Texas, is duly aur.horized to
se~:ice
State
fa rvarded
and existing under the laws of che State of Delaware.
VISION has cbtained a
5cace cf
are
cerr.ified mail, return receip-c requesr.ed.
10.
duly
the c i ca. cion
PEGGY F.
regis-cered agent, Cour~,
office, 200 Crescent
CATTEL~,
Suite 1JiS, Dallas,
Callas County, Texas 75201, 11. i
Defendanc,
··::::~ISTL;JIA.··), ~a .... s
:'.-.2
:ne:.e~ial
: f.
r::.e :::':'s
engaged
in
CHRISTIANA,
busir.ess
CHRISTIANA
cause.
Despite
the
serv ice
fact:
thac
f
0
at
all
Texas,
not.
was
designa~ed
noc
as
more
maint.ain
c i ca cion may be
it.
ci.mes
a
agenc in made
licensed
t.o
in
do
in t.he Stat.e of Texas, CHRISTIANA execuced and delivered
;::romissory
not.a
Dallas
Ca~las,
on whom
in
does
of =egular business in Texas and has no
=~s':'r.ess
a
has
Delaware.
desc=ibed below.
5 ta 1:e a E Texas
CORPORATION
ENERGY
a carpor-acion duly for:ned and existi!19 under
che Stat.e of
::e.:-ein,
::a=-::cu!.a=~y ~~ace
is
CHRISTIANA
in
Dallas,
Count.y,
Texas.
Dallas That.
Texas,
Count.y,
noce
is
payable
t.he crux of
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANeNT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TROST
Page 6
in the
ass~~ed
causes of action of
act.ion
asserted
c =mrni -: t.ed
ac -: s
for
nominee
by
which
cf
pec::':'on are S:.a:.e
of
fo:r....arded
Delaware,
:.
Ce rendant.,
fo!:ei~:1
~~:==
~c
a:
~:'1
as
~cre
The
:nay
causes
encity. cont.rolled
enc~cies
ACCOUNT
,,-::at
affiliat.ed with
the
regist.ered
Ltd.,
Incorpcrators,
by
FUNDS
c':t.ed by ser-Jing
be
a
is
CHRI STIANA
CONCENTRATION
prcvided
the
cieat.ion
and
in
t.he
Coffee
Run
agent.
Lancast.er Pike & Loveville, R.D., Hockessin,
KEYSTCNE
ret~rn
receipt request.ea.
FINANC:.u CORPORATION
("KEYSTONE ~) ,
t.he st.ate c: fcr:nat:ion and exist:ence of t.o
is known and is
requla~
cecause
corporat.e
CHRISTIAl~AtS
Plai:1t.i.ff,
although
a.
d~~cged hereinbelo~.
principal KEYSTONE
I
has ango:iged :':1. bus iness in Texas,
par~icularly de5cri~ed
belew.
KEYSTCNE does
nee maineain
business in Texas and has no designaced agent
Stat.e of Texas on whom service of citat:ion may be made in
cause.
c:::-.:-.ected
The
;..rith
by
causes
purposeful
cec~use KEYSTONE
C·..Ii.ec
t.o
:.i..'Tles rna 'ter ial herein,
:~e
..... _::
Texas
corporation,
=~siness
a ;:dce of :~
a
Texas
CERISTIANA
;resently unkncwn
i.s
'''/:-.:'=:-.
is
19i07, by cert.ified mail,
: 2. ~=
in
indivicuals or
of
State
?=c:essional Cent.re, Ce~=~are
pu~oseful
HAMILTON-TAFT
Accordingly,
Sec:-etar'l
from or are connecced with
and
have ceen dist.ributed to RC:C::~TS.
The
CHRIST!ANA
ROBERTS,
through
RCEERTS
arose
herein againsc CHRISTIANA.
PRASAD
of
acticn
aces
asserted
ccmmitt:ed
arose
by
f=om
KEYSTONE
are
or
Texas
in
is t.he nominee shareholder of record for shares
and
MAXPi'iA.R}(.A.
Accordingly I
KEYSTONE
be
may
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST TE~ORARY
Page 7
._-._-- .. ".
'
-._-----
cited =y serving
the ~ Secret.ary of
the ci:.at.ion
petition
place
of
Caroli~a
business,
27834, by
place af
c::m..rni ~ :ed by
arose
BELL
( 2 a ~)
shareholder
INC.,
the
Q
and
j
:.:-:e St:c=etary
f
in
Texas
wi th
I
t.he
of
in Texas
is
an individual
SELL does not maintain
anc.
has
no
agent on whom
:his cause.
i.n
Nort:h
=eceipt requested.
("8ELL~),
BELL
because
present.
(a)
he
shareholce.:-
The causes
is
a
f
in CR
I
of
of
may
access
to
-:'exas
financing the
shares
Spo~swood,
and for of
be cited by serling
~ay
provi:ied
ONS,
HAMILTON-TAFT,
sources
have
ACQU~SrT!
~hat
the cit.at.i::n and
New Jersey 08884,
by
cer~ified
133
mail,
reques~ed.
ccmpany duly
I
CR
ACQUISITIONS,
fo~ed No~ember
Dallas Count.y,
9,
rNC.
("CR
ACQUISITIONS")
I
1988, and existing under the
~ith
its principal place of business
Texas,
and may be served with citation
the State of Texas
in Dallas,
0
twenty percent
princi.;:a.l
Defendanc, cELL,
State of
De fendant
lot.
laws at
Greenville,
are forwarded to BELL'S pr1.nci?al place of business,
retu=n receipt
d
St:-eet,
~eturn
provided that
to KEYSTONE'S principa.l
adci t iana 1 options
accordingly,
C=escent Avenue,
is
w.
Texas
from cr are connec:.ed with purposeful acts
Acco~dinglYI
pe':.':'~:":Jn
mail,
current ccntroll:":lg
one
~C=::R.TS
TIMOTHY
fifth
citation 'may be made
asser~ed
is
West
regular business
serlics of
(b)
forwarded
in Plano, Collin Count.y, Texas.
resid:~g
ac:.:on
400
a.re
cer~ified
Defendant,
lJ.
a
and
State of
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..1o£PORARY RESTRAINING ORDER, EX PART!, APPLICATION FOR TE.HFORARY AND PER.M.ANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 8
by
in ~his ac~ion
service of cication upon its registered agent,
PE~·{
f.
SUi~2
1375, Dallas, Dallas County, Texas 75201.
CATTELL,
at
registered office!
its
Crescent:
200
Court:,
CASE OVERVIEW ~S.
This
indi'Jidually cant.=olling
case and
the claims
concerns
derivatively,
persons
I.Iho
have
by
a
shareholder,
against.
of:icers,
engaged
in conduct constit.ut.ing
direct.ors
and
tet.al abandonmenc and" disregard of :iduciar/ duties, to init.ially "' 1.00 t "
t.r.e as 5 et.s the
consr.:"t.ut.es ccmpany of
which
0
f. t.he who 11 y-owned corpora toe subs idiary which
primary
asset.
of
Plaint.iff is a
t.he
publicly traded
shareholder and, ·..Jic~out.
di'/est. t.hat corporate subsidia.ry
most.
shareholder
parent:
recently,
a~9r=val
and
in sucj a fashion as co const.it.ut.e an abdication and violation of fi.c·~=:.a_f
dut.ies
:5.
Derendant
inc':":lduals
pul:':"':"cly
held
M..a..x:::_a..R..'o(_~
his
or
minoricy shareholders of 7:he parent
t.he
ccrpora~ion.
ROBERTS,
affiliat.es,
corporat.ion,
th=cugh obtained
through
a
nominees
and
coneral of of
series
cC:J.t.=:lllea
~..A.XPHA.R."'!.A,
transac~':'ons
a in
ROBERTS arranged for HADID, an individual with whom he had
busi.:less
of
~o
held and traded
put::=~y
whic~
awed
::~SAD
dealings, ("PRASAD")
associated
int.erest
in
to with
assist.
:.he
majority
shareholder
=:egard t.o refinancing the
with ~he
ZWf~XPHARMA,
initial
in
indebt.2dness
acquisit.ion by PR.A.SAD of
exchange
for
which
financial
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TI:MPORARY RESTRAINING ORDER,
ex
of
PARTE, APPLICATION
FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 9
as sis t:ance right.s
acqu i red
ROBERTS
f
de
vat. ing
aCl:O
the majority int.ereses derivative
of
dis position
and
from his control of
t.he entit.ies and individuals involved.
17.
At. or abou t.
con't=ol of
t.ime
the
MAXPHARMA,
which
Ccmpany but.
was
divesi:ing
pe!'iod
when
pr=~ert:y
a
at:t.emptinq to ef fect.uat.e
"cash rich"
been
theret.ofore
payroll services CIGNA
by
owned
Insurance
to which CIGNA was seeking a purchaser, as CIGNA itself
non-insurance
of
had
CIGNA.
sust.aineci
rei-at.ed
asset:s
subst.antial
during
losses
in
a
the
and casualty insu=ance businesses.
18. of
as
had
also
was
ROBERTS
the acquisit.ion of HAMILTON-TAFT,
company
-=.he acquis i tion by ROBERTS of
f
0
Ear a i:=ansac'tion wherein cash asset.s
COSTELLO arranged
lJould
HAMILTON-TAFT
be
used
in
"reverse
a
repossession"
financing arrangernen't whereby said cash assets t.hemselves serJed as
~he
RCc£R.TS
means could
I
t.o
p u ~c ha s ed
treasury
invest.ment.
banking
sueject
t.he
TAFT
debt.
of
an
t:=ansact.ion, investment.
s ecur i firm
fait.hful
as
a
1: ie 5
·,..rith
banking
performance
firm,
we re
rights by
:-egard
the
cash of
the
wh ic h
satisfact.ion wit.h
con'tralled entity
ut.ilizing
:tA.'1ILTON-TAFT
this
In
transferred
to
~~XPHAR~A,
purchase
HA."!IL70N-TAFT.
was
which
by
of
asset.s
of
HAMILTON-TAFT
which
t.hen
in
he Id
repossession
~PHARMA
co
of
manies
and
by
turn the
t.hereon
fLa..MILTON-
paid
by
the
invest.ment. banking firm to CIGNA in sat:isfac'tion for t.he purchase
ot
P~~ILTON-TAFT
by
MAXP~~.
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION rOR T~ORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TROST
Page 10
19.
Once
for
ar.::anged ROSER~S
ROBERTS' had
the
acquired
acquisition
by
MAXPHARMA,
and
of
:-L\XPHARl"..A
t.urn
in
HAHILTON-TAFT,
then proceeded to remove the existing Board of Oirec~ors
for each company and replace them with COSTELLO and LITCHFIELD. 20. receives
tax
a
for
payroll
from
withholdings
account.s
in
funds
is
f{A..\!ILTON-TAFT
s erv ices
company
whic h
retains
t.hose
cust:cmer ciient.s,
subsequent
~a.yment,
is
entitled
co
ea.rn
interest on ~hose funds, and ultimately prepares returns and pays taxes, for
in
any
exc~ange
penalties
filing.
1:1
largest
'Chis
for which
respect,
companies.
(SUC:1
as
redai~y
After
P.&"!ILTCN-TAfT
funds
the
ot.he~
di=ect.ly
busi~ess,
contra~1
to
during
~o
be
dist.ribut.ed
a.ffiliat.ed
had
~han
no~
0:
not.es)
the
which c:;ul::'
of
MAXPKAR.'1A
from client.
for:n at
en~it!.es
of
secure assets
approximat.ely
1988
cont.=ol
be
tax obligat:=r.s.
control
removed in
the naeien 's
ut.ilized cust.cmer
ac~iring
mee~~~q clien~
acquisit.ion
of
one
11ab ie
imprc;:er
to
respec't
is
t=easurj
or
bones
caused
were
HA..'1IL:'ON-TAET and
or
f~ILTON-TAfT
ROBERTS,
by
with
ce
to
acquisition of
the
=edeemed for purposes of
21.
in
co
for any purpose
government
resul-c
1-!&.'1ILTON-TAFT
Prior
HAMILTCN-TAFT by R08ERTS,
acc=unt tunas
may
which
agrees
fWiIL7CN-TAFT
loans
wit.h which
S14
:nil.!.ion
acccunt.s to
and
of
~.AX?~.AR."!A
R08ERTS
did
all for t.he benefit of the interests of ROBERTS and all to the
in~erest.s
of
~he
shareholders of
MAXP~~.
I
PLAlNTIPPS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, ex PARTE, APPLICATION FOR TnO?ORARY AND PERMAlfENT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTI~ TROST
Page 11
¢sa
22.
As
consequence of
a
"lao-cing" of HAMILTON-rUT at
the
the direc~ion of ROBERTS, HAMILTON-TAFT was placed in jeopardy of being
unable
j eOFardy,
t.c
funds
purpose.
to
ROBERTS
Ant::nio
a
face
obligations.
required
Stanley
value
a
result. of
this
at tempe some means by whic h
t:)
of
shor~-t:erm
thac.
serJices of a goad friend and San
Rosencerg
D.
of
As
accom~lishmenc.
assure
engaged the
act:crney,
in
it.s
meet.
1-'..A.XPH.A.RJof..A was
obtain
loan
co
5625,000.00,
to ob'Cain a
(ROSENBERG),
as
to which approxirnat.ely
5:00,000.00 ·,..,as actually ext.ended {"FIRST ROSENBERG NOTE"}.
was
loa n
use d
tom e e t
from
cerivative
HA~rLTON-TAFT,
t:-ansact.ion, sha~e5
of
:1.0SENEERG
23.
the to
fulfill
In
appearance
a
good
County,
Enerov
C!'-.::-:'stiana
and
John
Texas,
H.
one
1988,
I
faich
wholly-owned
hundred
As
subsidiary,
(100\)
for
bee~
r
an
this
of
:~e
purpose
of
co
eniarce
ics
the
FIRST
for
this
crea~ing
the
ri<;hts
the wit.h
made, MAXPHARMA iniciat.ed suit in
styled !-!axcnarma,
Jr.
obtained
:-toha..'1led A. I ndi'l idual
Inc.
v.
Hadid, [the
Vislcn, an
Inc.
I
fr.ci'.ridual,
.. MAXPHARl".AI ROBERTS
seeking collection on indebt:edness owed by
SUIT")"
~x P HAR.."!A
f
part a f.
percent:
cE=proval rias
effort.
Cor~orat.icn,
Robert:s,
ir.s
0
to be pledged as collateral on
respect to loans which had Dallas
obI i gat ion S
cbligat.ions.
shareholder
Sept:emcer
of
it.s
caused
~~~ILTON-TAFT
No
or
inability
ROBERTS
NOTE.
s h 0 r t - t e rID
This
ROBE~TS
which
I P~NTIFPS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 12
Ci
Had ROBERTS repaid the amounc which ~as due
was chen in default.
~PHAR.MA would
and owing,
FIRST
the
::Jeg i n
NOTE,
ROSENBERG
transferred co
ha.ve
effect:uate
pledged collat.eral
rep leni s h
the
been in the pes i tion to sa tis £y
on
funds
the
to
fully
~art.:es
of
and
ccmpletely
reacquisition of
had
T~e
celat.e
been
cha various
24.
f~nancial
In
the
relat.ionship
=e1ie£
as
its
as of that time,
cr
f=::'er.d
1988,
ROBERTS
rest:rainlng
~C5ERTS
been
:ransierred
had
mismanaged
detri.:nenr. represent of
enti-ties, of
the
ROS£NEERG,
thee
sought.
XAXPr;..AR.."iA
of to
;:;asition
the
to
.:-!A.XPHAR."!A.
the
Cour1:
~nd
business
ROBERTS.
the
from
:.aken
transferr:":lg
Alt.hough in
the
in
ROEE~TS
in
ROSERTS
chat
lawsuie was
ROBERTS
(b)
nature
and
had
and (c)
failed (a)
exercised
extent
themselves
co
to
::=eated
the
was
~aQ
~hen
pct.ent.~al
to
acc'..lrately
the
nat'.Jre
the
the
ac~:ons
the fact that the management. of
and
-'cari.ous
financial
PLAINTIPFS' ORIGINAL PETITION, APPLICATION FOR TeMPORARY RES~NING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
any
~.A.X?HAR.'4.A
the
over
which
of
pleac.:.:-.gs ',Jas
subsequently,
What
·,."hich
ROBERTS
thae,
0ppQr~unity
concrol the
?laced
imposi::.on
had developed a business opporcunity which
~~?HA~~,
,
the
-,Jhol1y-owned subsidiary,
assets :0 satisfy the FIRST ROSENBERG NOTE.
for
of
danger.
December,
injunccl.ve
c0r.lduct.
from
pleadings in the lawsuit
indebtednesses which had,
HAMILTON-TAFT,
and
substantial
exten~
di vert:ed
:0 ene another and the fact.s associated with the c=eacion
!-'.AX.P~.AR.),l_~
d
the
fIRST ROSENBERG NOTE, and
whic h.
HAMILTCN-TAFT in the form of loans. fail
the
and
hazard
~~PHARMA
Page 13
.'.. --.. .
_~----::s-=::s-=
and HAMILTON-TAFT under the been such as
~
to
direc~ion
and conerol of ROBERTS had
loot" HAMILTON-TAFT in such a way as to
crea~e
the appearance that the diminucion of the value of HAMILTON-TAFT had been enable
result. of mismanagement. by MAXPHARMA and,
the
HAMILTON-TAFT
a.ssets
t.hese
process 1
(i)
obtain
under
the
ruse
had l
and (ii)
ac~ion
TAFT
to
ROBERTS
in
viable
as
MAX?H.ARMA
that
occurred as
the
entity
client:
with
shell
without
it any
exisci..:-.g
ha.d
been
assets
of
to
orches~rate
base,
the
and
leave
acquisition
t.he
a
of HAMILTON-
shares
before
and.
from
result of !'iAXPHAR-"'1..A'S
a
=use, to then
tha~
cash
of
1:he acquisition
ROBERTS could aCq"..li=e
the
HAMILTON-TAFT,
quantities
guise
and
as a result of
whereby
a
fact,
large
thereby,
detriment.
of
of
t:.he
Dresner Corpora t ion,
had
shareholders of the publicly held MAX?KARMA. P 1 a i n t iff
25. ~resent.ed
a
A.R.J.!STRONG,
through
MA.XPH.A..R.1J~
proposa 1 to
fc~
the
purchase
0
~?~-A.fL\,l..A
f
shares and c=~trol of the ~PHAR¥_~ coard in consideration f~r 53 .• 1 .
which
m~l._~on,
•... ould
stUn
ROSENBERG
NOTE
operating
capital
dnd
(b)
for
have
readily
pro\Tided
(a)
approxima1:ely COSTELLO,
MAXPHARMA.
nominee and controlled person of
ROBERTS,
business
the
oppor't.unit.y
HAMILTON-TAFT, R08;:RTS
to
to
sust.ain
sat.isfied
:IRST
million
S2.5
still
the
as
de
in
faceo
=efused to accept this
operations of
!'tA.XPHA..R-~
and
and ins1:ead proceeded en a course to seek to cause repay
t.he
ouc.standi:lg
debts
due
and
owing
to
MAX p H.A.R1wf~ • J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR T£MPORARY RESTRAINING ORDER r ex PARTE, APPLICATION FOR TEMPORARY AND peRMANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 14
.
26. Cour~
the
In
in
late
corporate
opport:unity
opport.unit.y
mismanaging
t.he
for
t.ransferred,
recur:1ed
co
sat.is i.y
ROSE~BERG NaT~
13
1989
I
of
sar.":"sfa.ct':"cn
then
Temporary
from
I
the
·.,rhich
ROBERTS
had
of
to
ha.ve
t.he
HAMILTON-TAFT effor~,
ROBERTS
res~raining
Order
Foreclosure
wit.h
ou~li~ed
capital a.s
suit
in
B. COSTELLO, C.
l'4.AXPP_h.R."tA,
was
any HAMILTON-TAFT assets on
the
to
FIRST
A.
I~IC.,
HADID,
Collin
and
~on~ague,
Count:y,
i.nfus:.cr.
LITC~:IELD,
INC.
his
Texas, of
tor of
sec=er.ary,
st.yled
MAXPH.AR1'.A,
JOHN H.
Indivicuallv and as
HAt."1ILTON-TAFT,
negotiate
above.
Shareholder
wAYNE
bot.h
r.ot.e
t.o
1989, AR."!STRONG sold his sha=es
Pat.ei C.
to
and
efforts
Rosencerg
first:
Individually
~OH.AM:ED
MA.XPHARMA
cont:.rol
NOTE.
t.he
that
Res'Craining
using
and cont.inued
consideracion
filed
Montaaue,
anc
a.
On or about January 23,
valuable
LA~RENCE
and
developed
t.ransferred
then .souqhr.
ROBERTS
c:he
acquired 500 shares of MAXPHARMA on or about.
add:~:~nal c~e~ating
28.
and
had
to
was set. for Ja.nuary 27, 1989.
~~STRONG
27.
M.A.XPHARHA,
In conjunct:ion with 'this
ROSENBERG
FIRST
ROBERTS
opport.unity
rescinded
obtained
the
that.
MAXPHARMA,
which
from ut.ilizing
MAXPH.A.Rl-f.A
who
of
all
ROBERTS.
succesz fully
fer
to
represent.ed
ROBERTS
SUIT for
business
transac'tians
January
1988,
the :-£AXPHARHA/ROBERTS
corporat.e
prior
December,
and VISION,
Pacty
INC.
v.
ROBER!S, :R.,
Shareholders INC.,
as
of
Parcy
I
P~NTIPFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
POR TE.KPORARY AND PEJUtANENT INJUNCTION, AND
APPLICATION paR IMPOSITION OF CONSTROCTlVE TRUST
Page 15
"ouc
De fendant:s,
and
rest.raining
ROBERTS
from
Order .was
Rest.raining
a
obtained
Temporary
act:ion.
furt:her
dissolved
t.he
Order
Restraining
This
Temporary
next. day upon
a
Plea
In
Abatement. with respect. to the Dallas Count.y case. 29.
9:55
At
on
a.m.
morning of
the
t.he offer of ARMSTRONG out.standing, sa tis f ied
Gardere
t.hrough
usi~
Wynne
&
payment.
a
t.rust.
and
wit.h
the FIRST ROSENBERG NOTE was
t.he
via
foreclosure,
Texas,
Dallas,
fund check,
law
the sources
fir:n
of
of ·,.rhich
was then unknown. 30.
On
~~STRONG
30,
January
1989,
and
for
valuable
consideration,
reacquired the MAXPKARMA shares which he had previously
held. 31 . firs~
February
a f
As
time from Ms. Fran
14,
1989,
A.RH.STRONG
learned
for
the
president of HAMILTON-TAFT far
Bar~lett.,
many years, that: Due
d .
be
init.':'at.ed
MAXP~~
in
order
to
bankr"Jpt.::y ·....ou Id
t.ha't
preserve
the
st.ock
fac~
interest.
t.hat ROBERTS had
NOTE,
t:he
funds
and
to be
t.rans ferred
assets
president:
of
approximately
purpose
of
to
sat.isfy the
HAMILTON-TAFT $560,000.00
to Gardere
satisfying
the
&
in
FIRST
caused
some
ROSENBERG
personal
HAMILTON-TAFT
funds
Wynne in Dallas, Texas, FIRST ROSENEERG
NOTE.
I
P~NTIFFS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR
~ORARY
of
Temporary Injunct.ion against: MAXPHARMA utilizing
HAMILTON-TAFT
. the
COSTELLO
by
in HAMILTON-TAFT due to the
obt.ained a
the
t.hrea t.s
t.o
AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 16
for This
transact:ion
was
ef fect:ua t:ed
i n t. ere s t. s
eli e n t.
destruction af
af
in order
to
(a)
HAM I L TON - TAF Tan d
HAMILTON-TAFT
business
protect:
t.he
a. v 0 i d
the
(b )
as a
result of being
involved in a bankrupt.cy. b.
The
attorneys
funds
for
transac~ion
by
obtained
were
ROBERTS, '..,lhereby
then
Gardere
used
ROSENBERG
to
an escr=""
fund
afforded
as
Wynne,
&
ROBERTS
an
09por'tunity to "buy back" the HAM!LTON-TAFT st:ock; c.
On
from
aut:horicy and
any of
t:.Jrn,
without.
inco
less
a
whereby COSTELLO c.aused
t=ansac~':'on
r.he
1989, MA.XPH.A.R..~
t.he
encered
ROBERTS
all c f
la,
February
shares of
ROBERTS
forgave Thus,
b:..~'wf.ILTC~-TA.FT.
·.... L::haut.
knowledge
p~blicl.y
held
P-A..'"!!LTON-TAFT
HAMILTON-TAfT
as co
MAXPHA.Rl-f..A,
the a
shareholders, than
:.he
MAXPHARl'.A
to ROBERTS and,
t.o
:~is
of
S
to
~ength
t=ansfer
MAXPP...AR1"..A
in to
transac:.::::n,
dnd
cr
the
shareholders
i-:.self
:"ad divested
ef:ect.::,ely,
or
COSTELLO
r.o ROBERTS and then,
cesul:. ot c£
arm'
~..AXPHARM.A
indebtedness
any
notice
of
had no assecs as
of february la, 1989.
]2.
On
february
ROBER.TS,
as
of
represent.acives additional
14,
February of
1989, l~,
AR-""..5TRONG
1989,
HAMILTON-TAFT
:-.ad
furt:her
di.=ecr.ed
to .ire
learned
ins~ructed
and
transfer
t.hat
t.o
HADIO
an
52 million for purposes as yet unknown but ~resumably
to either fur~her assist HAOIO in projec~s in which he is engaged J
PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR Te.."IPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TF.MPORARY AND PER.HANENT IN.nmCTIOH, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TROST
Page 17
con~idera~ian
and in
by
giving
ROBERTS
alter:1at.ively, order 5
to
As
and
t.o
of
HAMILTON-TAFT
g i ve n
has
wire
be
s1:ock
ins 'C ru c to ion s
transferred
ext.ent.
preserve as
ac~s
in
for
or,
held
as
an 0 t. her
accordance
that.
at.
and
leas~
ROBERTS
prot.ect:
whom
the
~PH.A.R...\f.A
t.he
ongoing
fl..AM.ILTON-TAFT,
with
int.erest.s
to
0
f
continued ~nd,
1989;
acquired the
needs to be imposed in
HAMILTON-TAFT prior
had
wrong full y
t=us~
the
loot.ing
February .10,
has
a const.ruct.ive
to
of
reveal,
asset.,
t.hrough
ent.ity,
asset.
f
primary
it.s
1988,
. shareholders pC:":1ary
release
out.lined
the
~~I~TON-TAFT
t.o
to
the
Janua"ry,
order
in other transactions;
to be given on February 15 or February 16, 1989.
inst:.=~ct.ions
fur~her I
a
ROB ERT 5
I
Sl,OSO,oao.oo
from
to ROBERTS
for a "st:.rawman" transfer of funds to ROSENBERG in
e c ~ r i t Y ian d
1'4..AXPHAR..."iA
support.
financial
effect.uace
3J .
reciproca~e
for which RADIO will
its
of
~.AXPH.A.RM.A
t.he
asset.
had
wrongful
been
the
t.ransfer
t.o
Rca::R~S.
DETA1UD FACTUAL BACXGROUND
ACQUISITION OF MAXPHARMA AND RAKILTON-TAFT
J4. and
is
HAMILTON-TAFT in
the
business
payment and filing of clients
of
egu-ivalent
was of
the
providing
employmen~
HAMILTON-TAfT t.o
incorporated
tax
pay
Cali fornia
1979
required
as
swns of
of
money
respect.ive
, PLAJNTIFFS' ORIGINAL PETITION, APPLICATION POR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERM.AHENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
for
In t.his capacity,
HAMILTON-TAFT
withholdings
in
tax comput.ing services re~urns.
tax to
in
Page 18
payroll
periods,
accoun~s
(~RAMILTON-TAET
with
the
which
agreements
HA."iILTON-TAFT
sums
HAMILTON-TAfT
CONCENTRATION ACCOUNTS·).
and
HAMILTON-TAFT
between
then
holds
CONCENTRATION
from
ACCOUNTS
i-cs
time
the
in
In accordance clients,
invest t.he monies contained
entitled to
is
HA.'iILTON-TAfT
said
in the
af
receipt
until the time of payment and have the use of the interest earned thereon
(with various variations of such
HA.'iILTON-TAFT
H..A.MILTON-TA.fT
existing with
Prior to the acquisition of HAMILTON-TAfT by
different clients). MAXPHAR..'1.A,
ag=eemen~
had
CONCENTRATION
only
invest.ed
in
ACCOUNTS
secure
from
monies
the such
invest:.ment.s
as tonds or treasury notes. Pr ior
3S.
c~ncer.t.=3ce
:cs
1986,
busi:less
a
H.A..'1ILTON-TAfT
wholly-owned
without:
MAXP:!A.R.'iA,
of
and as a resul7. af subscant.ial
port:folio
in
of
relar.ed
losses co
maC~2rs
ent:l':.':'es,
During early
HAMILTON-7AfT
C!GNA
CIGNA dec iced
ir.surance-relaced
HAMILTON-TAfT.
limitat.ion
purchasers
by
affilia.te
co sell any non-insurance
accordingly,
praspeccive
by
of
the proper't.y and casual r.y area,
in
including
purc~ase
o..,ned
During
ex;:e!' :enced
and,
t.he
was
HA..~ILTaN-TAfT
Car;oracian.
to
included,
1987,
without
limitation, ADF Corporation and Concrol Dat.a Corporacion. 36. Ms.
As a mat.ter of coincidence,
Fran
Bar'tlet:t,
("BARTLETT"), result
,
of
then
President.
on an airplane t.raveling
discussions
about.
t.he
~n ~arc~,
and (,0
CEO
1987, ROBERTS met. of
H~"!IL':'CN-TA..FT
washingt.on,
operations
of
D.C.
As a.
HAMILTON-TUT,
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR TE...\fPORARY RESTRAINING ORDER,
EX PARTE, APPLICATION
FOR TE.KPORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 19
(a)
ROBERTS
wit.h-all
of
known
HA."iILTON-TAFT
sr.eps
and
(c)
necessary
to
that:.
acquire
VISION,
ROBERTS
HAMILTON-TAFT
~OBERTS
which
had
claimed
the
where-
through to
a
cant:rol,
37.
to
in
the
same
ROBERTS
would
presen~
a
manner
as
had
previously been
immediacely begin to under1:a.ke
proposal
HA."iILTON-TAFT for
to
the
by VISION or some other entity cancralled by ROBERTS.
acqu~si~ion
Between March I
disc~ssions
1987
I
and ,july f
1987,
ROBERTS conducced
with CIGNA regarding the Fassibility of the purchase
~~~ILTCN-TAFT.
38.
In
July
canf~dent.iality ir.f:::~at.ion 1~8~, ··~.c
as
BARTLETT
that ROBERTS would be inl:eresced ~n cancinuing the operations
perfor:ned,
of
interest:
and
corpcration (b)
t.o
indicated
of
agreement
concerning
CIGNA,
.:5nopping
1987,
wit.h
and
C:GNA
HAMILTON-TAFT.
K&~ILTON-TAFTJ agreemen~"
VIsro~
and HT
ROBERTS
executed
acquire
in
order
to
On or
a.bout.
December
inc.,
~oldings,
a
en~e=ed
in~~
2, d
so chat CIGUA would r.ot: salic:t HA-'iILTON-
HT Holdings, Inc., was a wholly awned subsidiary of VISION whic~
had been
was a~
to purchase
~~rLTON-TAFT.
Between approximat:.ely August,
39. ROEER.TS
fo~ed
repeated
made
~repared
:east
to c lose
four
~hereafter
(4)
representations the acquis i t':"::n
occasicns
negated due
1987
to
the
closir.g
and December,
f
that, 0
f
inabili~y
through VISION,
he
and,
on
HA.'1ILTON-TA.fT;
ca~es
1987,
were
set
of ROBERTS
only
to be
to close t.he
~ransact.ion.
,
PLAINTIFPS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TEMPORARY AND PERXANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 20
Neither ROBERTS nor VISION were involved in any fashion
40. with
MAXPHARHA
t.hrough
late
from
1987,
the at
of
first: contact:
time
discussions
time
which
with
BARTLETT MAXPHAR...IoiA
with
init.iated. 41.
During the period of approximat.ely July 1
lat.e December,
through
ar:cempcinq t.o locat.e sources of
ROBERTS was
which would be available co ena.ble him
financing the
1987,
1987 I
acqu is it. io not HAMILTON -TAFT.
ROBERTS
to
did
effect.uate
not
have
an
indegendent financial base upon which to close such a cransact:ion.
42.
ROBERTS
vehicle
through
effectuat.ed. ir.cc~orat.ed
~XPHAR~
locat.ed
which
acquisit.ion is
MAXPHARMA
a
as
of
a
pot.ent.ial
HAMILTON-TAFT
publicly
in t.he State af Tennessee,
awned
corporate could
be
corporat.ion
the shares of which were
being traded an the American Stock Exchange .
Through a proces s
..\ 3 .
E=rec isely unknown,
ROBERTS
t.o c=nducr. negotiat.ions for the acquisit.icn for corporat.e
in
~he
en~i ty
through
which
~'"!ILTON-TA..FT
proceeded
~~p~~
as
t~e
would be a.cquired
following respect.s: a.
Bet,\oreen July,
manner present.ly unknown, wit.h RADIO,
1987,
a.nd
December,
1988,
and in a
ROBERTS est.ablished a relar.ionship
a Saudi na~ional of purpor~ed subst.ant.ial wealch
addit.ionally, supposedly had banking connecr.ions wit.h a
who,
,
National Bank of
Washing~an;
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR n:KPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
~ORARY
Page 21
b.
concrolling
A
block
of
st:.ock
in MAXPHA.RMA was
owned by PRASAD and, on informacion and belief, PRASAD had a substant~al
Bank
of
said
loan
loan guaranteed by T.
Washingt:.on,
funding
believed
for
c.
where
the
to
a
int:.errelatianship
learned
t.hat
t.he
by
PRASAD
and
influence,
const:.ituting
his
of
incerest:.
in
Sank of Washington,
financial
difficulcy
in
personal
or t.hrough
and HADIO,
PRASAD
Nat.ional '''''as
PRASAD
significant
resulc of sheer coincidence,
between
link at.
had
associated ·Jit.h
acquisicion
Eit.her: as
f~nancial
be
HADID
Bert Lance at the National
t.he
ROBERTS
with
t.he
wi t.h
the
loan of PRASAD at. t.he' National Bank of Washingt.on; d.
ROBERTS
pr:Jposit.ian ::r
ROBERTS
t.hrouc;h
ar.d
l::y
that.
and/ or
approached
HADID
and/or KADID,
PRASAD
either
individually
ccncrolled or aff.:.l':'ated ent.icies,
acquire a controlling interest in
utilize !'!.A.XPHARl-'.A as
~~p~~~
would
and, t.hereaft.er,
t.he corporat:.e ent.i.ty which would then
acquire HAMILTON-TAFT; e.
The
ROBERTS
by
~XPHARM.A
ex~ension
Bank
of
considera~ion con~ernplaced
and/or
included
HADID
che
of fact:.
would be neqociat.ed Washingt:on,
(ii)
the
chat. for
ROBERTS
for the acquisicion
int.erest:
PRASAD
favorable
(i)
PRASAD and
of
wi~h
~he
HADID would
t.erms
of
National provide
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMFOSITION OF CONSTRUCTIVE TRUST
in
Page 22
quaran~ies
personal
on the loan of PRASAD with Lhe National
Sank of Washing~on, (iii} approximately
S3
HAOlD would be provided a
million
from
asset:s
the
af
loan of
HAMILTON-TAFT,
once it had been acquired, which said funds HAOlD would t:hen projec~ in
utilize with respect to a convention involved
Aspen,Colorado,
in
and
would receive 750,000 shares of -i4.
In
cont.ents
the
wit.h
accordanc'e
of
a
Schedule
of
on Decemcer
VISION
ROBERTS
and
HADID
Nat.ian'll
Bank of
20,
0
1987,
execut.ed
:NC.
as
t.he
evidenced
Securities
in
November and December
personal guarancies
a
int:eresc.
~allas
t:hrough
~...AXPHAR?-f.A
from PRASAD of )3.3% or che cammon Sl:ock of
Officer below',
over
and
of
t.he assignment.,
President.
ROBERTS,
~PH.ARJof.A
of
t.h:-ough dnd
·..:sed
of
PRASAD
MAXPHARMA.
his
was
t.he
as
t.he by
an
Chief
Execut.ive
asser~ed
':':ls'trumenc
a.n
MAXP~~.
discussed more
(As
concrol of 'I!SION
~..A.XP[-l...a..R.."'tA
to
Couney, Texas,
a.ssig~enc
time
a.nd
Delaware corporat.ion wit.h
t.he
the
by
1987,
of PRASAD and ROBERTS,
favor
acq'Ji=ed
At.
HADIO
MAXPHARl-f.A by ROBERTS on behalf
("VISION"),
con:=::lling
and
wic~
filed
princi9al place cf business in Dallas,
i~~
and/or
~~P~~.
the i:-
Washingt.on in
and t.hrough VISION,
f
ROBERTS
foregoing,
t.he 13-0
Exchange Commiss ion en behal f
(iv)
which he was
or
fully
cont:rol cool
to
acquire HAMILTON-TAFT. 1 45.
Once
cont.rolling
its
, rl9ht .
ROBERTS/
int.erest.
chraugh
in MAXPHA.RMA,
VISION, VISION
had
assigned
acquired co
MAXPH.AR.MA
to purchase KAMILTON-TAFT.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR ~ORARY
RESTRAINING ORDER, EX PARTE, APPLICATION
POR TEMPORARY AND PERMANENT
INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
t.he
Page 23
According
46.
t.o - BARTLETT par~
ai=plane during the early
the
was
locate C'H,
president:
for
source of
a
agreement
with
sold
af a was
COSTELLO
the
regarding
COSTELLO
obedience
the
1987.
assist
its
was
him in
parent:.
whereby
att:empt:ing
ROBERTS
t.o
the purchase of reached
ROBERTS
Chai~anl
the
COSTELLO, who
would
arrange
president.
a.nd
an for
CEO
af
and 'Chairman of ~~ILTON-TAFTJ plus the payment:
INC.,
the quid pro quo consideration for which
$1 million bonus, (a)
to
by
ccsr:::!..LO to be inves'tsd as ~P~JULU~,
of December,
Trucking Company,
C&H
financing
being
which was
and COSTELLO met. on an
ROBERTS
J
effectuating
~PHARl-'..A
af
opera tions
the
COSTELLO -ith
of
desires
of
ROBERTS
and HAMILTON-TAFT and
acquisition
by
MAXPHARl-C..A
=epresentat.ives
of
H.A..."1ILTON-TAFT
the
of
(b) C&H
Trucking Company. "'7.
in Cecember, by
=.nd
-/ehi.cle
1987,
:.hrough
Jdnuar/, TAr'!'
a
fer the
VISION,
through
p~!L:aN-TAFT
48.
advised
RCEERTS
which
:0 to
time of -=.he intent. of
ut.ilize
:-!AXPHAR."'..A
effec-cuat.e
t.he
as
the
ROBERTS, corpordt.e
acquisit.ion
of
the
stock.
Furthermore,
1988,
firs~
late
ROBERTS
financial
lat.e for
funding
'the
in
December,
first:
st.ruct.ure
1987,
early
or
in
time proposed 'to HAMILTONorchest.rat.ed
by
COSTELLO
whereby a "reverse repo" lending 'transaction would be structured, said "reverse repo~ being cons'tit.ut.ed essent.ially as follows: I
P~NTIPPS' ORIGINAL PETITION, APPLICATION FOR TeKl?ORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TI2!FORARY AND peRMANENT INJUNCTION, AHD APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 24
a. TAFT
CONCENTRATION
Weil
Labouisse
in cash
ACCOUNT
was
t:aken
treasury
Invest;nent
million
S4.1
aggregate
in cash
no t e
MAX PHARMA
of
b.
5S
million
whic~
of
about December 30,
29,
an
t=ansac~~on opera~ing
MAXPP~
by
in considerat.ion
CIGNA.
to
treasury
owned
by
CONC~NTRATION
Thus,
bills
the
in
t.he
HAMILTON-TAFT
and
ACCOUNT FUNDS;
and,
ftras
transac~icn
the
5900,000.00
to
be
paid on or Co
be
en or about January was
ultimately, drawn down by
funded
by
t.he
~p~~~ agains~
expenses.
On or about January 29, agreemen~
HAMILTON-TAfT.
The
required several hours funds.
paid
5500,000.00
additional
stock purchase
of
Security, 'Inc.,
1987, and 53.6 million of which was
the closing of
1588,
49.
Howard
Although the tocal' purchase price was stated to be
million,
paid ac
be
sec ured
wa 5
amount
to
purchased with HAMILTON-TAFT
54.1
HAMILTON-
to be held as security for repayment. of a
note
promissory note to be executed by for
the
and depos i t:ed wi th
FUNDS
Friedriche
from
WElL-), with which funds HOWARD WEIL then obtained
(~HoWARD
a.
million
SS
Upon
1988,
~PH.ARl'f.A
entered into a
with the affiliate of CIGNA to purchase .. reverse
entire
r-epo ,.
loan
trans act.ion
to consummate wi~h respec~ to the exchange
conclusion
l
however,
ROBERTS,
by
and
through
, PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERM.ANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 25
conc=olled encities and individuals, including without limitatic COST::LLQ,
effectively purchased
had
acquired control
and
0
HAMILTON-TAFT with the assets and funds of HAMILTON-TAfT. 50.
While
rela tive
some
significance
conc~~sion
known
MAX?~~
the
transaction
respect
51;~~:~=ant
as
of
acquisition
of
debt.
to
conswnrnar.e
a
negacively
~
that:
t.he
the
and the
deemed
to
thac
(b)
ttle
fact
forgiveness
by
to INTERPHARM,
occur as
MAXPHARHA
from the
con~racted
said
had
a
i~ability
transacl:.ion
impacted
upon
the
financial
the outline of transac~ions with respect
follows: In
March
of
of
the
PRASAD
was
(SO\)
sale,
af
extent co which the forgiveness of
indebtedness
a.
ext.ent
~~PHARHA
pre\riously
t.he
operations of MAXPHARMA,
is
in
INTERP~~ deriva~ive
(ii)
-
r:esulted
evidences
(i)
liability to
which is as
the
HAMILTON-TAFT
significance
!NTERPHARM and
the
transact:ion~
the
(a) coincided at or about the time
wit:'1
percent:
t.o
INTERPHARM,
transac~:on
which
to
:'_.l.X?'f-l'.AR1"..A
t~
in
between MAXPHARMA and a
Sl,231,500.00 in loans from
of
forq:'/'eness
of
a
INTERPHAR.."i transact.ion
the
wit.h
involved
under the new control of ROBERTS was attempting
:-!AXPHA.RMA,
that.
is
of said
conclude
t.o
directly
the acquisit.ion by MAXPHARMA of HAMILTON-TAFT,
t.o
corporation
when
not
Pres ident: and CEO.
1987
J
~XPHARH.A
purchased
stock in INTERPHA.RH. INTERPH.A.R.M S
Likewise,
I
At
controlling
eight.y
the time
0
f
shareholder I
PRASAD was also the President
J
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TYMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR T~ORARY AND PER.MANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 26
af
MAXPH.AR..~.
ag-reement,
MAXPHARl".A
and
CEO
issued
common
In
acc:Jrdance wit.h
exchanged
st.ock of
the
487,951
the
acquisit:ic
of
shares
company on March
31,
eight.y percent. (BO\) ownership of INT!RPHARM.
newl:
1987,
fOt
An additional
521,227 shares of MAXPP~'S common s~ock .as issued on or about. July 15, 1987, for no additional consideration. b. d
INTERPHAR.."l: incurred
sign if ic ant . drain
Oc t. 0 be r
of
of
sale
all
144
?R.ASAO ~,
to
agreed
of
INTERPHARM st.ock
agreed
t.o
surrender back
shares
of
wit.h
the
c:Jnnec:.i..on
::eleased
it.s
stock
original
INTERFHARM
from
available an
cash.
In
agreement.
for
t.he
Pursuant.
to
t.he
PRASAD.
shares
009,178
also
back
execu t.ed
~PH.AJUof.A
agreement.,
losses and proved to be
MAXPHARMA' S
~.AXPHARMA
1987,
INTERPHAR..'i
rescission
on
large
ret.urn
to
t.o
PRASAD
o'WTled by MAXPHA.R.."fA, to
~PHAR.MA
that.
PRASAD
t.ransac:.':'on. repayment.
of
all
of
received The
and t.he in
agreement:
51,231,500
in
:oans f=cm MAXPHARMA plus accryed interest..
c. or
Closing under the rescission
about.
February
8,
1988.
HO\olever,
deliver 100,000 shares of MAXPHARMA'S ?ledged as
agreemen~
occurred on
PRASAD
s~ock,
failed
which had been
to American National Bank of Jacksonville,
security
for
cer":ain
personal
to
indebt.edness
of
Florida, PRASAD.
Based upon information and belief, PRASAD has still not. made ,. delivery of the 100 1 000 shares of stock to MAXPHARKA.
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEXPORARY AND PERKAlfENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTROCTlVE TROST
Page 27
~
0 uri n q
51.
1 9 8 8,
HL'i I LTON - TA.F T
approximately $14,510,581.00,
pro v ide d
net
fun d oS
0
f
constituting loans or transfers of
to or for the benefit of individuals or entities con~rolled
funds by or
affiliated with
fallowing (dates and
a.
transac~ions
1/31/88:
HA..~!LTON-TAfT
pu=c~ase
including without
ROBERTS,
$5
were
being approximate):
million
actually
HAMILTON-TAFT.
limitation the
to
HOWARD-WElL.
used
In this
to
enable
Funds of
l"f..A.XP~.A
to
$5 million of
transaction,
cash was taken from the HAMILTON-TAFT client tax truSt funds and
used
to
purchase securities which were
na.me of
HAMILTCN-TAFT
pledged
by COSTELLO act:ing
HA~ILTON-TAFT,
in
the
in
on informacion and belief,
and,
the
for
issued
were
his capac i ty as Cha irman of
benefit
of
MAXFH.AR-'iA
and
held
or
pledged by HOWARD-WElL as
security for a loan to
54.1
paid to CIGNA for the purchase by
~illion
~~X?~ARM.A
5900 :~r
I
of which
from
~as
CIG~lA
of
000.00 of which wa.s
HAMILTON-TAFT.
The
HAMILTON-TAFT,
and
~~PHARMA,
t:.he
=emaining
to be ut:ilized as working capit.al remaining
S900,OOO.OO was,
dissipated at. the cont.roi and direction of ROBERTS
in fact,
for the
benefit of ent:ities or affiliat.es cont.rolled by ROBERTS, and no~
for working capital.
b.
2/26/88:
$1 million to HAXPHARMA.
J
PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR ITKPORARY AND PERM.ANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 28
3/8/88:
d.
3/11/88: $2 million to Hadid Development Co ..
e.
3/23/88: 5815,000.00 to CHRISTIANA, INC.
f .
4/21/88:
Corooration. payment.
to
ro
International
provided
as
part: a f
million
52
funds
were
acquisit.ion of
Hadid Development Co.
which
of
C&H
COSTELLO
Nat:.ionwide,
been
had
r.he
a down Inc"
ROBERTS could noe arrange
far
a
former
The r.ransact.ian cculd not. close due to che
fac~
financing suff':"::ien'C
to
tract of real estat.e associated wit.h the sale of
pay far a
the
t.he
company
president..
thar.
These
Ear
t.=ucking
$1 million
~o
c.
trucking
::rlnci~al
and
company. interest:
51,500,000.00
Approximately has
been
repaid,
t.he
with
in
present:.
talance on this loan being 5662,000.00. g.
5/88-10/88:
$1
million
in
manaaement.
During
t.he
referenced
period
:ni 11 ion
was
trans ferred
from the accounts
MAXPHARMA
":0
~anagement.
for
the
of
purpor't.ed
time,
fees.
approximat.ely 0
purpose
HAMILTON-TAfT
f
of
sat.isfying
fees and related pur;ort.ed expenses.
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR ~~ORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.KPORARY AND PER.M.AHENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TROST
51
Page 29
h.
to
_11/88-12/88:
amount.s
were
ACCOUNT
FUNDS
o~era~ing
52. 51,
for
M.AXPRARMA
The
sup ra,
operating
trans fer=ed
to
expenses.
frcm
l-f..A.XPHARMA
the
fallowing
The
CONCENTRATION
HAMILTON-TAFT
for
'transfers
representing
purpose
of
~PH.A,R1o(.A
expenses: i. 11/9 - 535,000.00; ii.
11/16 - S22,000.00;
iii.
11/21 - 5228,000.00;
iVa
i2/2
Si2,OOO.ao;
v.
12/22 -
57~,OOO.OO;
vi.
12/28
510,000.00.
fund
transfers
all
were
~ILTON-TAFT
$411,000.00
referenced
uns ec ured
fund
numerical
in
t ra ns f ers
paragraph
made
from
the
CONCENTRATION ACCOUNT FUNDS.
LAWSUITS On September
53.
tr.e
:"34t.h
District
··~_UPH.A.R...~/ROBERTS
CORPORAT ION, pe~~~nent
Court,
~FH.AR.."!.A,
Da.llas
A.
HADID,
and
Dallas,
INC.,
JOHN
brought
INC.
County,
against VISION,
SUIT")
MOHaMED
H.
suit
Texas
in
(t.he
CHRISTIANA ENERGY ROBERTS,
JR.
In
part the pleadings allege t.he following mat.t.ers:
That
d.
1988,
13,
common
HADlO scock
con~rolling
and
ROBERTS,
of
~..AXPH.AR.'!A
in~eresc
t.hrough
VISION,
sufficient
to
give
acquired chern
therein;
J
PLAINTTFFS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMAlfENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 30
a
b.
'lISrON
That.
positions
and
and
ROBERTS
caused
their
exercised
to
l-I..AXPHARMA
loan
cont.rol
to
VISION
5625,000.00 as evidenced by two promissory no~es in the
amount
af
SlOO,OOO.OO
and
5525,000.00,
each
of which
nor.es has come due and is currently in default;
VISION, HADID, and ROBERTS exercised their
T~a~
c.
to
HAMILTON-TAF'!.',
cause
subsidiary·- of
ev idenced
MAXPHA.R.MA,
HA...\'{ILTON-TAFT,
which
loan
:0
promissory
a
by
noee
then
the
wholly-owned 53,000,000.00
HADID
given
not:e
has
come
con~rol
from
HAOID
and
due
is
to
in
default; Tha t.
:i.
and
ROBERTS
VIS ION
caused
HMIILTON-TAF'!'
5875,000.00 to CHRISTIANA ENERGY CORPORATION,
c::nr.ralled ncc.a
by
from
::ehalf
of
CHRISr:ANA
CHRISTIANA
which not:.e
Chair:nan,
as
ROBERTS,
evidenced
E~lERGY
ENERGY
has
by
a
come due
and
by
is
loan
a company promissory
CORPOR..~TION
CORPORATION
to
signed
on
ROBERTS
as
current:.ly in
default.;
a.
Tha t
ROBERTS
d u -c y
not
~
corporation loo~ing
the
and VIS ION
had
breached
pro fit
dis pro po r t: ion ate 1 y
a or
i~s
assets
subsidiaries, of
t.heir
by
l"..AXPHARMA a.nd
it.s
: iduc iary f ra m
systemat:ically subsidiaries,
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TF..MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.MA.NENT INJUNCTION, AND
APPLICATION
POR
IMPOSITION OF CONSTRUCTIVE TROST
the
Page 31
said
loot:ing
having
consisted
:Jf
the
borrowing of
asser~s the
corporate assets which MAXPKkRMA
Defendants
cherein never intended to repay; f.
That:
the
funds
been
used
by
the
personal gain,
a
so;.
Ja.nuary. 15,
ROBERTS,
:1.
CiolO
COSTELLO
Direct.ars, agreement.
bet.ween
acq~i.si.:'i.on
of
::-::>71
cwne=snip t.hereof.
at
certain
ROEERTS' woe:-e
not.
par~
in
1
for
t.heir
had own
execu t.i ve
and
a.nd
VISION,
ROBERTS
filed
~XPHARz.-..A/ROBERTS
af
members
LITCHFIELD, ROBERTS
COSTELLO,
INC.,
a
t:hrcugh t:he Affidavits on file of
t.he
~PKkRMA
seeking
and
SUIT I
S
against Board of
rescissicn of regarding
l-f..AXPHARl-f..A
and
L:LTCHFIELD
to
act.s relat.ing to P..AHILTON-TA.FT dnd
an the
relief
resr.rain
~~PKkRMA's
The councerclaim alleges, among ocher things:
That alt.hough
R08ERTS
ar.d
therein
therein
HA.."ULTON-TAFT by l-f..AXPHA.R-"!A and injunctive
ce!."~ain
a.
Defendants
for payment of a Jaguar car and
1989,
VISION,
~.AXPHAR.MA,.
aga':':"iS:' ~~em
JR.
and t.he
MA..X?::_~=t."La..
the
Defendants
such as
ccunt:e==laim susta.ined in JOHN
to
home for ROBERTS.
~ersonal
an
loaned
opt.ions
to
specified
acquire 475, 000 shares of prices
right to purchase awarded
their
had agreed to award VISION
MAXP~~
in
exchange
Kk~ILTON-TAFT,
opt.:'ons
as
for
~..AXPHA.RMA
VISION
and
VISION and ROBERTS
allegedly
agreed
to
J
PETITION, APPLICATION FOR ORDER, EX PARTE, APPLICATION FOR TE..."{PORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST P~NTIFPS' ORIGINAL RES~NING
TEMPORARY
Page 32
by
Tha~ COSTELLO,
b.
~AXPHARMA,
HAMILTON-TArT
t:o
abligacions,
and
result:
0
f
which
been
have
may
and ocher officers and direc~ors of
MAXPHARMA
operating
expenses
HAMILTON-TAFT' s
of
pay cenain debts,
to
order
in
ou~
funds
"upscreaming"
of
MAXPHAR.'"!A,
st:ock may have
been
as
a
in an
immediace danger of loss and/or diminution in value; Tha~
c. and
cirec~ors
t.o
obt.ain
MAXP~~
of
MAXP~~
and/or and
Associ-acion
P..A.'iILTON-TMT,
risk of
value
the
and
it.s
:'ndirec~ly
=unds,
G:lY
f ram
in
loan
HAMILTON-TAFT
and
stock,
to
st:ock
fr::m
from
pledging
a.
hearing
a
direc'=ly
and
t.rans ferring
or
grant:.ing
securi ty on
of
~p~~,
H.AMILTON-TAFT,
any third-part:y a pending
pose
consequence
or acherJise
I
co
of
and diminution
a
di.=ec~ors,
ocher..,tise,
or
asser-ced
as
Savings stock
cest:raining
Order
acqui=ing
ac~emp~ing
the
injury,
harm,
transferring,
grant
were
officers
Caprock
pledge
co
act:ions
Rest.~aining
office!:'s
by
from
loan
at::.empt
suc:J.
obcaining,
to
a
subst.ant:ial
as signing
a ~-:ernpt:ing
were in che process of
HAMILTON-TAFT's
which a Temporary I~IC.
an
which
pot.ent:ial
co
fund
in
o~her
and COSTELLO, and/or
the
and
or
int:erest: Temporary
rnjunct:ion. 54' . Ear
a
On J anua.ry 19,
Temporary
1989,
Injunct:ion by
with t.he Counterclaim filed,
a hear ing was he ld on the reques t: VISION
and
ROBERTS
in connec~ion
at. the conclusion of which the Court:
J
ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION P~NTIPFS'
POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 33
ent.ered
an
Ord-er
that.
request:
the
of
VISION
and
Temporary Injunct:ion be grant:ed and chat MAXPHARMA, and
be
direct.ors
indirect.ly funds
rest:rained
obtaining,
by
loan
assigning,
or
acquiring,
55.
On
24,
199th judicial District Court:,
COST::LLO,
ROBERTS,
LI'r'CHFIELD,
shareholders of MAXPH.A.RMA, INC.
and
joined
~PH.A.RMA,
INC.
as
par~y
Defendants
~u=:::~aser
ac:.ion
the ac~s
as
:0= co
and
from
in or on
the
individually and brought: suit in
Collin Count:y, bot.h
HADIO,
Texas,
indiVidually
against: and
as
INC.,
HA."!ILTON-TAFT,
INC.
and
VISION,
INC.,
HAMILTON-TAFT,
INC.
and
VISION,
(t:he
considerat:ion of enjoin
and
any
on t:he merits.
("~ONTAGUE -),
INC.
or
tran:sferrinq
Patt.i Mont.ague,
1989,
direct:ly
HAMILTON-TAFT
t=~al
for
its officers
from
or any ocher enc'.lmbrance
as a shareholder of MAXPHAFJ-f.A,
t.he
from
st:ock pending a final January
enjoined
or ot:herJise
ot.herwise,
t=ansferring,
~~ILTON-TAFT
and
ROBERTS
"~ONTAGUE
the
rest.rain
SUIT-).
!'!ONTAGUE,
shares of ARMSTRONG, the
Defendanr.s
from
brought. cert:ain
related t:o MAXPHARMA's ownership of HAMILTON-TAFT & COMPANY,
a wholly-owned subsidiary of MAXPHA.R.MA,
alleging in
~aterial
respect:
a.
That
delivered nOLe
in
t:a
r.he
( .. ROSENBERG ,. NOTE,
in
July,
Sta.nley
D.
original NOTE")
~XPHARHA
and
1988,
MAXPHARMA
Rosenberg princ:'pal in
executed
order
and
its
original
amount: r.o
execuced
of
secure
delivered
to
promissory
$615,,000.00, the
ROSENBERG
ROSESB£RG
, P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION
TEMPORARY RESTRAINING ORDER,
FOR nKPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 34
a
security stock
int:eresT:.
of
lien
all
upon
well
as
HAMILTON-TA.FT,
HAMILTON-TAFT
shares
the
as
of
Common of
possession
the
s~ock;
Tha c
b.
and
the
and as a resulc,
ROSENBE RG
NOT:: was
currencly in
de faul t
the HAMILTON-TAFT stock may' be in Lmmedia~e
danger of loss and/or diminucion in valuej c.
That.
MAXPHARMA
··ups treaming"
order
funds
pay
to
and
out:
of
cercain
HAMILTON-TAFT
debe
poceneially
were
CaSTELLO
to
obligat.ions
MAXPH.A.RMA
and
in
operating
expenses; d.
Tha t:
M.A.XPHAR.."!A
or directors of
to and
obt:ain or were
e.
MAXP~~
fund
a.
loan
potent:ially
r~~ILTON-TAFT
in
That
injunccion
and COSTELLO and/or other off ieers
from Caprock Savings
attempting
connec~ion wi~~
c~nduct:
such
enjoining
the
ac~empt:inq
were in ehe process of
t.o
pledge
Associacion
the
stock
of
said loan;
warranted
Defendanes
imposition
from
of
an
aetempt:.ing
to
?ledge the HAMILTON-TAFT stock. 57 . grant-ed ROBERTS
On January 24 ,
in
the
filed
a
MONTAGUE
Plea
19 B9,
same
as
the
However,
SUIT.
in Abaeement
asserted by VISION and ROBERTS the
a Temporary Res training Order was
on January
st.dt.ing that.
in ehe
26
I
1989,
the counterclaim
~.AXPHA.R.MA/R08ERTS
SUIT was
claim assert.ed and t:he relief requested
in the
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RES~NING ORDER, ~X PARTE, APPLICATION FOR nMPORARY AND PER.MANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TRUST
Page 35
pending MONTAGUE SUIT and that I
Dallas
Count.y
Court
had
dominant.
acquired
Collin County case should be abat.ed. in Abat.emenr. was
foregoing I
the
jurisdict.ion and
the
virtue of
by
the
ROBERTS a.nd VISION'S Plea
granted on or about January 27
1989,
I
and the
Collin County case was ordered to be consolida~ed with the Dallas
Couney case. DIveSTMENT OF HAMILTON-TAn STOCX
TO CR ACQOISITIONS, INC. 58.
CR
ACQUISITIONS was
sec retary for ROBERTS)
(the
aTTELL
Agent for service of process, ad dr e s s
2 a0
af
~o
lisced wit.h resgect: On
or
=.:. <; h t. s
T A.fT
prey ious 1 y
Ac~~isit.ions,
60. (20\)
BELL is
of
furt:.her
CR
10,
~resent.ly
2,
owned
of
has a registered Te x a s
7' 5 2 Q 1
by
Q59
I
1989,
in
a
f'..llly i<nown,
a0 0
s hare S
~XPHARMA
0
-ere
f
transact.ion
the
t.he ceri:ificat:.es
s t. 0 c kin P...AM I LTO N-
t.ra.ns f erred
t.o
transac~ion
CR
in a
unknown. co own approximately twent.y percent
understood
A.CQUISITIONS,
informacion
.l ry S u bSl" d'a
by
the Reg ist.ered
Da 11as,
wit.h VISION being involved in the
presen~ly
respect
Sui t e l 3 7 5 I
February
!: he
cf
c~~pany
1988,
this corporat.ion.
about.
t. her e t. 0
also
is
9I
No officers or directors are presently
details of ·.... h:cn are not. ar
who
I
and which
ere see n t:. Co u r~ I
(the address of ROBERTS).
59.
incorporated November
and
E·Jl"ng ....
plus
celief
01"1 ,
I
::::lnd g
various
BELL has
also been
options
therein.
cont.rols provl'ding
Coms-cocx,
On
a
subscantial
J
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AHD PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 36
.
~
. -. -1-----'--
..
4
financial
sypporc
ROBERTS a1 i ve ")
and
sustenance
for a period
0
co
Nkeeping
(i.e.,
ROBERTS
fat. leas T;. t.wo (2) man t:.hs prior co
February 10, 1989. On
61.
or
about.
cransaccion co be
effec~uaced
cherecofore owned by [ .. 2/10
~x(PHAR.J.!A/CR
Al though
62 .
~~ILTON-TAFT
February
MAXP~~
la,
wherein t.he
ca.used
ROBERTS
1989,
s~ock
a
of KAMILTON-TAFT
was cransfer=ed co CR ACQUISITIONS.
ACQUISITIONS HAMILTON STOCK TRANSFER"]
the' det:.ails
0
STOCK TRANSFER are
f
:.he
MAXPHAR..."'!A/CR
ACQUIS ITIONS
unknown, some of che informacion
which is known is as follows: a.
On February 10, che
ACQUISITIONS
purcha.se
price,
loan,
the
pay a
purchase
amount.
proceeds
the
of
exercise
of
9r ':'ce
S600,OOO.OO
and
const.it.ut.ing
relat.ed
which CR ACQU!SITIONS
VIS leN and an
to
2,059,000
ACQUIS ITIONS
(presumably
addit.ionally
to
execut.e
f rom
a
coses
has
of
of
t.he the
agreed
co
., exerc is e pr ice"
to
has ag:=eed t.c
ACC:UIS:L:TIONS
CR
shares
co loan CR
ROS ENBERG agreed
price
Additionally J
HA.MILTON-TA..FT.
pledge
1989,
Sl:ock
VISiON)
purchased to
by
Rosenberg,
security agreement.
in
favor
CR and
of
Rosenberg;
b.
VISION, CR ACQUISITIONS,
ROBERTS and Fran Barr:le'Ct.
who
has
been
t.he
~JL~ILTON-TAFT,
("BARTLETT-,
princi~al person
~p~~,
a California resident
managing
r:he
affairs
J
P~HTIFYS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR ttKPORARY AND PElUiA..NENT INJUNCTION, AND
APPLICATION POR IMPOSITION OF CONSTROCTlVE TRUST
Page 37
of
.---. -......-..<
4
_
...._ .
_.
HAMILTON-TAFT pursuan~ co ROBERTS
and
instructions and directions of
che
entered inca an assignment. of option
COSTELLO)
I
rights, the details of which are unknown;
c.
ac
convened
meet.ing
direct.ors'
A
time
which
of
CR
R08ERTS,
ACQUISITIONS
SELL,
and
a
was
person
ident.ified and known only as "Claire", who is believed to be a
girlfriend
( "CLAIRE")
'",,-.
other
or
'~T affairs,
-----.
direc~ors
the
were· made
acquaintance
social
charge of
in
or affairs with respect.
of
ROBERTS HAMILTON-
the previous assets
t::l
of HAMlt""l'ON-TAFT.
63.
"
""
On Februarr .14,
1989,
BART!.ETT advised A.RJof.5TRONG of the
"
following
activit.ies
·..thich
had
cccur~ed
respect
with
to
the
operations of HAMILTON-TAFT: a.
~~erations
f
of
the
person
person
·... ho
mi llion
S2
..... ho
has
cver'seeing
is
was
dir~':t.ion of
and
trans ferred
CONCENTRATION ACCOUNT to Amerimac, by RADIO.
United belief,
been
des ignated the
by
present:
~~~!LTON-TAFT;
...At----t.he inst.ruction
b. 0
ehe
as
RcaERTS
sum
is
BELt.
f.:-om
the
ROBERTS,
the
HAMILTON-TAFT
a corporation cont.rolled
KADIO is believed to be presently outside of the
Stat.es. the
It
funds
is
unknown,
transferred
but
to
on
HADID
informat.ion
and
at
are
Ameri.mac
intended for transfer to some other account;
PLAlNTIPPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAJNING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.KAN'£NT INJUNCTION, AHD APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page JB
c.
on
February
staff
members
Also
HAMILTON-TAFT
stat.ed
to
that on February 15, "1989,
or
14,
1989,
ROBERTS t
Fe brua ry
16,
ROBERTS or an
1989
his
further
I
designated
direct:ions
represent.ative
S 1 , a 5 0, 000 . aa to
addi t iana 1
a
be
would for
a
qi ven by
transfer of
des tination and account
presently unknown; d.
c~ncerning
the
u~on
Based
expressed
£....."pr~priety
the
f
0
the
and confr:Jnted by :.he
being made,
concern
of
BARTLETT
distributions which were insistence of ROBERTS and
3ELL that. the transfers be effect:Iated", BARTLETT resigned. 54.
TAFT r
BARTLETT
been
had
is
C:GNA,
HA~!:'":ON -TAFT,
HA..~!:::JN-TAFT ccn::~ence
at
all
one
the
wi th
and
times
acutely
company
founding persons for
more
than
of
ten
during
her
cont=ol
of
as c: Januar/, The
knowledgeable and
of
HAMILTON-
(10)
HAMIL~ON-TAFT
client:
the
maincai:led
the
febr".lary 10,1989,
years,
base
of
acc::unr.s
of
in a level of
and maintained proper accounting prccedures
trus~,
aC~..1isition
key
the
clients prior to
to
the
f
es t:abl ished
ha 5
part':'cularly,
65.
0
the time period prior to t.he ownership of
incl~ding
by
was
any
presence
restrictions of
at
HAMILTON-TAFT,
thereon
subject,
incidental
rtAMILTON-TAFT by ROBERTS
to
the
and COSTELLO
198B. nature
components
of
or
inr.eqrity with clients,
tr.e
assets
HAMILTON-TAFT business of
is
such
t.he business operations
are
that (1)
(2) efficient management and (3) computer
PLAJNTIFFS' ORIGINAL PETITION, APPLICATION FOR TE.MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.MPORARY AND PER.KA.N"ENT INJUNCTION, AND
APPLICATION POR IMPOSITION OF CONSTROCTrvE TROST
Page 39
data will
utilized
bases be
due.
to
properly account:
Thus,
standpoint are
the
principal
the
of clients,
funds
been expressed it has
for
t.ax payments
asset.s
from fa
which
monetary
as t.o which has previously
right of HAMILTON-TAFT to invest
been the
properly and utilize interest earned. 66.
One
management
f
0
agreements
the
of
the
f ir~
and
timely
pay
any
tax
H:AMILTON-TAFT
BARTLETT ·... as
under
ar~se
would pay any penalties which
of
of customer
this attest.s
funds
of
obligations
in
~xcess
f~i~~~i~g
On February 14,
development.s a.
the
had
wh~ch
by
dis t.r ibu t io ns
ROBERTS
on
management
and
re~pect
1988,
based on a
Accordingly,
billion.-
S~
February
st.aff
at
long-needed (C)
was
BARTLEr~.
as of that dat.e:
occu~=ed
the fact. that
BARTLETT
improper
fir:n
t~is
In.
BARTLEIT advised ARMSTRONG of the
1989,
Not~ithstanci~g
resignation
':aking a
of
clients.
to the proper management of KAHILTON-TAFT under the
auspices of management overseen by 67.
HAMILTON-TAFT
from the failure to properly
HAMILTON-TAFT paid a sum of S5,000.00 in pool
that
during
af 14,
to
due
funds 1989,
her refusal
as
suffering
(b)
directed
BELL
HAMILTON-TAFT
vaca tion,
true reasons far
~he
had
~hat
was
(a)
no
to by
BELL
announced
OJ
i th
attendant.
emot.ional stress, none of which was accurate:
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLID..TION INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTROCTI~ TRUST
FOR ttKPORARY AND PERMANENT
and to
SARTLE:TT was
longer
from drug problems
perform
Page 40
t.he t.o
Emp 1 oyee S
b.
0
f
HAMILTON-TAFT
are
concerned
and
fearful of the improper management of the firm which appears to be ongoing and increasing:
c.
We'lls
inst:itutions
pas t ,
the
acc~unts
t
8ARTLETT
Bank,
with which
one of
the
principal
HAMILTON-TAFT has
reported
(i )
an
ove rdra ft
financial
done business of
in
H.A.MILTON-TAFT
in the amount of 52.5 million, (ii) upon being told
BARTLETT
hat.
Fargo
wa s
1 onge r a t
no
HAMILTON-TAFT,
contacted
to inquire of the status of accounts,
independen~ly
expressing concern in that regard over the continued banking o~erations
between Wells
Fargo and HAMILTON-TAfT,
and (iii)
expressed
a
be
level
desire
to
provided
with
some
of
assurance that checks of KAMILTON-TAFT should continue to be honored.
have
advised that several HAMILTON-TAFT clients
BARTLETT has
:0.
c8ntacted
her
very
absence from the company, intent:on
to
terminate
=ecent.ly
expressing
concern over
and several clienc.s have
their
business
relations
her
indicated an
with HAMILTON-
TAFT cue to the recent change in management.
69.
The
developments
depietion of assets FUNDS
and
the
of
recent
events
with
respect
to
fram the HAMILTON-TAFT CONCENTRATION ACCOUNT
change
of
management.
have
(1)
confirmed
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TIKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.KPORARY AND PERHA.HENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 41
the
co~~ained in
allegations
SUIT
respecting
~~PHARMA/ROBERTS
the
alleged
the
past
conduct
SUIT and MONTAGUE
and
futu,re
intent
ROBERTS with respect to depletion of H.AMILTON-TAFT assets" and
of (2)
resulted in endangerment of the relations with, or termination of the relations of, six (6) major clients. 70. mi 11 ion
On
February be
to
ROBERTS
1989,
trans ferLed
ACCOUNT FUNDS to an f:~
15,
from
accoun~
the
and
caused
BELL
HAMILTON-TAFT
$1.5
CONCENTRATION
in the name of the Dallas, Texas,
law
of Petit & Martin.
TEXAS SECRETARY OF STATE RECORDS 71.
In
ccmplexit.y their
addition
and
t.o
t.he
int.eract.ion
proclivity
to
of
utilize
foregoing
facts
acti'Jity among
corporat.e
the
entities,
evidencing
the
Defendants
and
searches
of
the
data published by the Texas Secretary of State corporace records
c i 'J i
5
ion
5
officer,
how s
t. he
direct.or
Defendants
with
i~corporated
f a 1 2. 0
or
the
'"J
i ng
a f f iIi a
registered
following
t
ion s
agent)
( i . e ., of
corporations
s e rJ ice
the
which
followin<; are
eithe!'
or authorized to do business in the State of Texas: ROBERTS Standing of Cornoration
Cor:Joration Name
Affiliation
Nor~hlake
President
Active-not in g'ood standing
Presidenc/ Director
Inact.ive as of
Corporation
Robercs Interests, Inc.
1/18/88 due to non-payment 0 f franchi!e tax
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORAAY AND PERMA.N'ENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
as
Page 42
~*o
Plus
~~O,
Inc.
President
Inactive as of 12/01/85 dUF to
non-payment of franchise tax Mac=~,
Inc.
President/ Regis~ered
Agent The faust Company a f San Antonio Mac=~
Spor~s
Construction, Inc.
Cup, Inc.
Macro Realty, Inc.
President.
Active - not in good standing
Secretary/ Treasurer
Inactive as of 1/20/87 due to no n- pa yme n to-of franchise tax
secretary/ T1:"easurer Regist.ered Agent
Inact.ive as of 1/18/88 due to non-payment of franchise tax
President/
Inactive as of 1/18/88 due to ncn-payment of f:::'anchise tax
Regist.ered Agent Mac:'::! I:lvestment: ~rGper~ies,
Inc.
Robert.s Aspen Proper't.ies, Inc.
JHR
~n~erprise5,
Inc.
Downhill Associates, Inc. '
Inactive as of 1/18/88 due to non-payment. of franchise tax
President/ Regist.ered Agent
Inactive as of 1/18/88 due to
non-payment. of franchise tax
Presiden~/
Inactive as of
Registered
1/20/87 due to
Agent
non-payment of franchise tax
Presidentl Registered Agent Vice President
Inactive as of 1/18/88 due to
of franchise tax
non-paymen~
Inactive a! of 1/09/89 due to non-payment of franchise tax
P~NTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, ~X PARTE, APPLICATION FOR TEMPORARY AND PE'RMANENT INJUNCTION, AND
APPLICATION POR IKPOS ITION OF CONSTRUCTIVE TROST
Page 43
Ci ty M.ini, Inc.
PrE!!iidentl Registered Agent
Inactive as of 1/18/8s due·to non-payment 0 f franchise tax
CATTELL
Corcoration Name
Affiliation
Standing of Cor;Joration
HT Holdings, Inc.
Registered Agenc
ActiV'e Good Standing
Reqistered
Active Good Standing
KV Holdings, Inc.
Agent:
INC.
Registered Agenc
Inactive as 0 f 12/5/88 due to non-payment of franchise tax
CR Acquisitions, Inc.
Registered Agent:
Active Good Standing
Nor~hlake
Secretary
Active Not in goed standing
President! Sec=etary
:naco:ive as of
VISION,
Rater~s
Corporacion
Interescs,
Inc.
~i~e
1/18/88 due c=:) non-payment c f franchise t.ax
~~o
Plus
~~o,
Inc.
Sec roe t.ary I Treasurer
Inacti ve as 0 f 12/2/85 due to non-payment 0 f franchise tax
~acro,
Secret.aryl Treasurer
!nc.
Inactive as of 1/18/88 due to non-payment. 0 f
franchise tax
The Faust Company of San Ant.onio
P~NTIFPS'
Secretary
Inactive as of 1/18/88 due to non-payment: of franchise tax
ORIGINAL PETITION, APPLICATION POR
TE.MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR nKPORARY AKD PER1Q.NENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 44
Mac~o
Realty, Inc.
Sec~et.ary/
Treasurer
Inact:ive as
0
f
1/18/88 due to
of franchise tax
non-payme~t
~ac=~
rnves~ment
Properr;ies, Inc.
Secretaryl Treasurer
Inacti ve as 0 f 1/18/88 due to non-payment 0 f
franchise tax Rober'ts Aspen P==pp.rt:ies, Inc.
Sec::-etaryl Treasurer
Inact:ive as of 1/20/81 due to non-payment 0 f
franchise tax Downhill Associates, Inc.
Ci~y ~ini,
Inc.
Assistant:. Sec~et.ary
Vice President./ Sec=etary
Inactive as of due to non-payment 0 i. franchise tax 1/09/89
Inactive as of 1/18/88 due to
non-payment: 0 f franchise tax
COSTELLO C =:: ::-:: c rat i
c n Name
~.AX:~V.A,
HRC
INC.
Consultant.s, Inc.
Af:':'liation
Standing of Comara cion
Registered Agent
Activ'e In goad standing
President
Inactive as of. 1/09/89 due to non-payment of
franchise tax PRASAD
Cc:-::oration Name
Aff:'liation
Standing of Coroorat.ion
President
Active I good st.anding
P.S.P. Investment Co.,
Inc.
PLAJNTIPPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR nKPORARY AND PERJoI...AHENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 45
·CONSENT OF BARTLETT TO SERVICE AS INJUNCTION MONITOR i2.
Februa ~
On
16,
,
BARTLETT adv is ed ARMSTRONG tha t
1989 ,
BAR.'!'LETT •.... ould be willing to serve as
a
monitor
Court-appointed
concerning the operations of HAMILTON-TAET in accordance with the te~s
and
mish~
i~pase
be
provisions
until such
ar:.iculat:.ed
and
any injunctive relief which t:.his
of
t~e
fur~her
as
imple!nented
Court
protective measures could
concerning
the
operat:ions
-:f
III. COUNT ONE
Derivative Suit Based Uoon Breach of Fiduciary Duties By Officers, Directors and Controllina Shareholders :3.
Pursuant to Tex.R.Civ.P.
::y
re=::'!..eges
The
-:-..J. ~~S7RONG
pa::.e~~
actions
c:Jmplains
cf conduct,
Original
Plai:itiffs' AR.~s:-~onG
a
reference
cor,s equence
numerical
and ccnduct of
const~:.ute
conti~uing
Petiticn
~~STRONG incorpora~e5
paragraphs
the
1
thrcugh
Oefendant.s
as
derivative 0
Defendants as
f
the means
dnd
and
:':J which
and manifest an ongoing c=urse and
through the date of the filing of herein,
whereby and
through
being damaged as a shareholder of MAXPH.A.R}'J..,
is
':::uble
58,
shareholder
of
and as as
HAMILTON-TAFT,
and manner in which the conduc,:
to which complaint
which
0
f
a t.he
is made constitute a breach of
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST T~ORARY
Page 46
f
iduc iary du tEes of
shareholders per:'':'':1en t
hereto
is. of
~his
to be
owed
record
MAXPHARHA
and
directors
ati all
HAMILTON-TAFT
and
~ontro11ing
times
as evidenced by the facts set forth herein·.
owner
during
one hundred percenc
t~e,
At
CCS7ELLO
shares
the Defendant MAXPHARHA.
of
t= ~ns ac~ions
ongo ing
the
made
the
parent. corporation and sole owner
all times mat.erial and pert.inent heret.o,
were
direct.ors
the
and
officers
and ROBERTS was
by
e'J'idenced
As
:Jas is
of 0
f
(100%) of the out.standing shares of P-AHILTON-
cor~orat.ion ~~p~~,
".
500
ARMSTRONG was and continues
least Februarf 9, 1989.
TAFT ~hrough at
75.
of
~PHA.R."!A· ~as the
th':'s sui t,
the
of
the
PRASAD
and
defendant
a controlling shareholder
fac:.ual
recitat.ions
set.
for'th
the Defendants have engaged and are engaging in a course
?at.tern
unla''''fully
of
interests the ~ e in, ~.AX?~ARM.A
by
conduct
deprive,
l"J\.X?F...A.FL"tA of
1989,
f fie ers,
suit and at the present
Fu r:.~e!'Jlore,
and
0
At the time of the ongoing transactions made the basis
a
he~eLn,
by
constitut:'nq
deny
or
in
scheme
defraud
the
and
ar't':":ice
to
shareholders
of
the true and fair value of their respect.ive equity
in MAXPHARl-f..A derivat.ive a!l
a
we 11 and
as to
effectuating
de r i vat. i v e
from
=
f c m the
HAMILTON-TAFT and
t.heir
causing
as the
of
shareholder
rig h t. f u 1 at
least
dissipation,
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORARY AND PERHA.NE.NT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTI~ TRUST
status
i n t ere s t
S
February
0
f
9,
conversion,
Page 47
misappropriation, and
waste
of
relationships
corporat.e
co~?orat.e
and
exist:ing
Wit h out
1 im ita t ion,
ACQUIS IT!ONS,
of
scheme
t.o
~~e
in
the
alter ego, ~ix
af
ref'Jsed
on
and
as
ext.ent
said
income,
as
t.he
forgi'Jeness
liabil i ty
tax
of
afEiliateg
",..rell
BELL,
wi thout
1 imi ta tion
evidence
reflects
and
Five
Twenty
in March 1988, via
VISION
to
the
to
abovecapi tal
as a consequence of t.he series of
entities
were due on June 1,
de!'r.and
the
through
dis s ipa te and ....,as te
caused MAXPH.A.RM.A to
Hundred
(56:£::,000.00) whic~
the
abo v e
R08ERTS,
forqi'Jeness
of
indebt.edness
of
reduc~ion
and/ or
in
form of accounts receivable.
Furt.her
he=~inabove,
of
to
inc idents
'79.
h is
and
for ~ h
ass e t
~PHAR..'{A
af
to
HAMILTON-TAFT
HADID
incebtednesses
asse~s
artifice
various
the
cosr::Lr...o,
c rea t.es
int.er-
f
a'iILTON-TAFT have bene f i t.ed
shareholders
and
~UPHARJ-f.A and
loans
0
RADID, BELL, CHRISTIANA, VISION,
and
MAXPHA1U'..A
of
det.riment
aut.l l..:led
result
a
f act. 5
the
evicence that. ROBERTS, COSTELLO,
the
as
opportunit.ies
stock ownership_
i 8.
CR
business
corporate
for
tender
pa~ents; and,
on
payment
in
information
the
that
ROBERTS,
se~
as
:or~h
·..-IS~CN
via
as
loan VIS ION the tot.al amount.
(2)
bot.h
and
NollOO
Dollars
Promissory Hat.es each of
Although of
Eacts
Thousand
t-..IO
1988.
payment.
to
MAXP~.A
notes,
principal, and belief,
VISION
while has
made
failed
making
now
~ritten
~nteregt:
forgi.'Jen
indebt.edness.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR T'eKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPOR.A..RY AND PERKANEHT I NJUNCTI ON, AND APPLICATION FOR IMPOSITION OF CONSTRUCTI~ TRUST
and
Page 48
said
•
Fur~thermore,
80.
and
hereinabove,
referenced
withoUT:
abou~
or
on
limitation March
to
fact.s
the
198~
8,
HADID
I'
,
ROBERTS, and COSTELLO caused HAMILTON-TAFT to loan HADID the sum of Three ~~llion and No/lOO Dollars (53,000,000.00) which was due and payable on or before April
4,
1988.
was been made by MAXP~~ on RADIO, Note
the
was fac:.
said
been
nOT:
damaged
was
the
t:o
23,
Mar::::h
the
1988,
.s h a =- e hal d e r e f :.her-eo f
in
CHR:ST::ANA No/lOO
and
the
of
in
a
Dollars
and
however,
upon
ago
per:or:nance
facts
alleged
ROBERTS,
to
the Note,
Ho~e.
and,
fJ..A..MIL:'ON-TAFT,
de 1 i \Tared infomation
of
ROBERTS,
of
his
by
to
those
t
'J' ely
as
f
0
:. n t: e r ~ s t
the
0
CHRISTIANA
and
with
controlling
evidencing
as
a as
about.
loan
:'0
Five" Thousand
chairman
solely
interest.s
a
without
or
on
HAMILTON-TAFT
Note
belief,
dealing
i
as
Sevent.y
the
aC':ing
a
caused
ROBERTS
and
business
V'
Hund=ed
Eight
of
act.ing
ci e r i
but:
herein,
which
~PHARMA
of
and belief,
det.ail
while
($875,000.00),
prejudice
in
despite
transac'ti.on
shareholders
infot:71a~ion
upon
~...AX P HARM
sum
the
exec u t.ed
or
MAXPHAR:tA
interest:
Additionally,
1 imi ta tion
hant
and belief,
infonnation
Thus, KAnID is in default under the terms of the
81.
alte!"
by
forgiven
equity
the principal amoun~ of the
in default under the terms of
that HAD I 0 was
Not.e
s~cck.
and on
paid;
Although written demand
f is
wh.ich
it.
merely
device Despite
for :0
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
the the
cause
mul tiple
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR 'reXPORARY RESTRAINING ORDER, EX PARTE, APPLICATION fOR ~1fi'ORARY AND PERMANENT INJUNCTION, AND
was
CHRISTIANA;
conduit a
and
page 49
ye~
been
Seventy
Five
demands for payment, no part of the CHRISTIANA Note has paid,
and
the
amount of
principal
,
Eight Hundred
Thousand and No/IOO Dollars (5875,000.00), together with
in~er~st
thereon
although
demand
from has
March
been
23,
made:
1988,
remains
al though,
on
due
oWing,
and
informa tion
and
belief,
ROBERTS and COSTELLO may have recencly caused the indebeedness to be
forgiven,
as
furcher
shareholders in and as
ar~i~ulated
82.
to
damage
upon
~XPHARHA
Promissory Note
information
executed
and
fo=~h
and
=e d
cc~cn
by '!'"..... o s~cck
belief,
to
~i 11 ion
of HAMILTON-TAFT,
under
notified
info:-:nation
... ithcut
whic~
execu ted
and
and
the
de 1 i'Je!:"ed
to
ROBERTS
belief
of
aided
of the
~he
FIRST
default,
5
-"'as
h a!" esc f ~eld
MAXP~~
by
his
ROSENBERG
under
MAXP~~~
ROSENBERG
and
its
:iundred
had teen theretocore
As of December 15, 1988, terms
~uly
~·h':ch
F i f ~ Y Ni n e :- ~c usa nd (2, 0 5 9 , 0 00)
the FIRST ROSENBERG NOTE.
RCSE~aERG
the
ROSENBERG
{S61S,OOO.OOl
personal Guaranty, guarantying the obligations of
default
but
in the original pr':":Lcipal amount of Six
ROBERTS
in
of
herein, on or about
delivered
and ::'::.een Thousand and No/lOO Dollars 5 e ~ t.:
intere!t.s
hereinabove.
Also,
1988,
the
the stock of ~.AXPH.AR..'iA and HAHIL:'ON-TAFT,
limitaticn to the allegations set 14,
to
was
NOTE.
R"OSER:'S,
and abetted by ROSENBERG,
upon
has
caused the indebtedness due and owing on the FIRST ROSENBErtG NOTE to be discharged in such a fashion as to result in the 2,059,000
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..HPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.MPORARY AND PERMANENT INJUNCTION J AND
APPLICATION FOR IMPOSITION OF CONSTROCTlVE TRUST
page 50
shares
common
f
'0
percent
an
as
(100%)
~~TRONG
attemp~
or
would show that such transactions were mere
cont,=olled and
MAXP~JUL~
influenced by
and
BELL,
ROBERTS,
PRASAD,
~PHARHA,
to deplete and dissipate the asset.s of
and HAMILTON-TAFT in order to gain cont.rol of HAMILTON-
as the major asset of
for an amount. of Six Hundred
~~p~~
(S615,000.00)
less the
I
market value for such stock.
84.
~~STRONG
~':'::le
CG5 T:': L L a
capac:':'':'es ~?HAR.."'..A, ~he
the
of
RGeE R:- S ,
loot
COSTELLO,
~CQUISITIONS,
KEYSTCNE, CR
and Fifteen Thousand and No/lOO Dollars
t::e
through
by the Defendants, acting in concert with one another
H.AMILTGN-TAFT,
fai~
prev ious ly held
the HAMILTON-TAFT shares
of
RADIO, VISICN, CHRISTIANA,
TAF~
H.AMILTON-TAFT
f
ROEERTS controls.
en~ity ~hich
83.
0
to have been transferred to ROBERTS, who now holds
MAXP~~
hundred
stock
as as
would further and
loans and
and
alleged
transfe~s
H.A D ! D ,
direc'Cor,
alter~acively
of
~~at,
at
alleged herein,
stock
in: h e i r
show
res pe c t. i v e
0
r
.: a rio us
officer or c:lnt.=olling sharehclder of
herein,
corporate assets of
were conspiring MAXP~~
too
dissipate
and
and its subsidiaries, and
did so through a scheme of fraud, breaches of their fiduciary and scat~:cry
and
a
dut.ies and obligations to
civil
~~ILTCN-TAFT
conspiracy,
:~e
shareholders of
intentionally deceiving
and their respective Boards of
~~?~~
MA.X?HARMA,
Director~.
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR nHPORARY RESTRAINING ORDER, EX PARTe, APPLICATION FOR TEKPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF
CONSTRUCTI~
TRUST
Page 51
85.
Fur-cher
and
alternatively,
and without
limitation of f
the facts an
attempt
No/lOO to
as alleged hereinabove, for
Hundred
Six
direc~or
cor~oration
fraud VISION
of
the
and
~PH.AR.."'.A
t.he
corporat.i~n,
the
by
never
Upon
intended
HAMILTON-TAFT.
and
HA...'1ILTON-TAFT)
of
!:'easonable
The
Hundred
Fifteen
value
of
the
2,059 COO
in excess
of
such
~PHARMA
of
the HAMILTON-TAFT shares
intended for conversion amount,
damage and injury to
that.
the
the
all
and that
!,Jas
due also
(to wit:
out-standing f~~m
for
Dollars
fair
the
and
shares
HAXPHARMA
in
belief,
amounts
No/lOO
a
of
was
well
ulti..rnat.e divest:.rnent
from
cons-citutes
a
substantial
~~PHARMA.
ARMSTRONG would breached
so
and
of
such corporation
fac~ I
ego
MAXP~~
of
T:-tousand
the
alter
ROSENBERG NOTE
asse~
so
receiving,
and
Dollars
shareholder,
repay
fIRST
not.·",iths~anding
market
Defencant.s
Million
No/lOO
information
to
~~ILTON-TAFT
86.
and
an
to essentially purchase
Six
(5515,000.00),
and
cent.rolling
corporations.
HADIO
and
amount
Three
Thousand
Five
an attempt. to loot the sale corporate
:he
of
amount
from RAMILTON-TAFT and for VISION
Twenty
controlled
upon
the
from MAXPHA.RJof...A in the guise of loans to an officer
(5625,000.00) ~nd
loot
(S3,OOO,Ooo.aO)
Dollars
loot
to
RADIO
the various Notes were made in
fur~her
thei.r
and add:t:onally show that the
fiduciary
duties
to
MAXPHARMA
in
directly or through cont=olled entities or affiliates,
PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR TE.HPOM..RY RESTRAINING ORDER, ex PARTE, APPLICATION FOR 'ttKPORARY AND P£RHANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 52
personal
loans
Defendants
from
never
oppor't:unities,
and
and
MAXPHARHA
intended
to
convert:ing
the
RA.M.IL'I'ON-TAFT,
usurpinq
repay, major
asset
of
the
which
corporate for
MAXPHA:RHA
less than fair market value. AR~STRONG
87.
has
relieved from any requirement:,
effor't:s
no
made
to,
should
and
to have t.his sui t
brought for the
consideration of the respective 80ards of Directors of HAMILTON-TAFT,· since
and
demo ns tra t e
:.ha t.
any
the
facts
e f for-=.
sue h
outlined
as
ROBERTS, as a controlling shareholder of TMT,
either directly or derivat.ively
e x ere i
5
per son s
ed
by
ROB E RT Sup 0 n
directors
of
such corporations,
~PHARHA
from
whose rv e now,
and
upon
as
in
that:
?~ILTON-
the 0
clearly
control
f f ice r
informat:ion
r
and
sale
c=nt~ol5
t~e
80ards of Direc:.ars of any ccr;orations or corporat.e
of::ce~s
and directors as to
Peti~ian
c=uld
Defendants, ot~er~ise
less fraud
t~an
to
the
allegations
other",ise
would
not
~hich
be
have
P.AMILTON-TAFT,
con~ained
than
aCl:.ions
in
this
through
against
admitted to their conversion of corporate fair markel: value,
in obtaining personal
breaches loans
accordingly
or whom decisions with respect
resolved
taken
and
0
t.he
=esponse
of
above
fu ti le,
arising
and
~~p~~
be 1 ie f.
to
shareholder
be
'",ou ld
be
0
f
Original
suit.
themselves
or
proper~y
for
f iduc iary duties,
:rom the Corpora ticn,
and
wi thcut
ever intending to repay such loans.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORDER, EX PARTE, APPLICATION POR nKPORARY AND PER.MA.NENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
The
~RARY
Page 53
8S.
The facts as sec forth hereinabove further evidence thE fiduciary duties owed to the :ninority sha~eholders ot
breach of
HAXP~..A including
MAXPHARMA
(viz.,
do
to
HAMILTON-TAFT)
in
proposed
the
89.
C:::1
Based on
LTON-TAFT, to
do,
of
vote
':0
on the ·sale or
~P~JUL~.
foregoing,
since
which
AR~STRONG
t.he Defendants
r-t.AX?P..A.RMA
HADID,
ACQUISITIONS
H.A.."!!~TCN-TMT
and
PRASAD,
CHRISTIANA,
ex~enc.
hold
the
~...A.XPP.ARH.A
:hey
fears
will
VIS:ON,
are nat stopped entirely,
both "'~PHARHA and HAMILTON-TAFT, ~~TRONG,
::-easc:;ably
their assets if and to the
deprived cf aELL,
from vat.ing on said
appropriate and distribute the asset:s of
to
c. inue
the
transact.ion
asse~
transfer of the principal
HA~I
and ",olithout
shareholders
exc~~ded
the
of
a result and consequence of :he existence of a vested
inte~est
power
the'· extent
notice
''''ithout
being provided to
so
affording shareholders not otherwise mat.ter as
to
has effectuated a transfer af the primary asset
other Defendants,
int.ention
limitation ARMSTRONG,
individually and in collusion and concer~ with the
that ROBERTS,
of
without
cant:inue
ROBERTS,
and
will to
be
COSTELLO,
KEYSTONE,
and
CR
thereby causing shares in
includi~g
those shares owned by
to be greatly depreciated in value or rendered totally
·.Talueless. 90. under
The
future
management
circumstances
suc::ess
exercising
following
of
~..AXPHAR.\I.A and
sensible
:,usiness
HAMILTON-TAFT, judgment
restoration and disgorgement. of
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR TE:KPORARY RESTRAlNING ORDER, ex PA.R'n, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION fOR IMPOSITION OF
CON5TRUCTI~
TROST
and
assets
Page 54
wrongfully
divested,
accordingly.
However,
specifically without VISION,
will
be
successful
the conduct of
limitation
CHRISTIANA,
and
Crt
prevented by injunctive decree, will each
of
of
MAXPHARMA
ir=eparable
injury to
~~?~~ and
of
bee a. use
i tis
including -'
des~~~y
unless
gro~h
the
t.here
imp 0 s sib 1 e
to
now
prospects
thereby
causing
inci·.. . icually and in
far ·...hich
SELL,
RADID,
ACQUISITIONS,
MAXP~v~ and
HAMILTON-TAFT,
,
COSTELLO,
HAMILTON-TAFT,
A.RMSTRONG,
their shareholders,
1aw
and
will -appreciat:e
the Defendants,
ROBERTS,
KEYSTONE,
and
right.
of
HAMILTON-TAFT and all
:'s no adequate remedy at
c: a 1 c u 1 a t. e
IN
i ~h
~ther
or
d ama g e S
specificity. Fur~hermore,
91 .
addi~ional
relief,
injunctiV'e
relief
escablishmen1: of :-filii-on
Fi::y
a
and not by ·... ay
temporarily
stock, such
if
such
stock
wrongfully
is
Nine
Thousand
transfer was
convert.ed
the for
cont=ollinq shareholder of relief,
ARMSTRONG seeks
P~NTIFFSf
not main
les
5
by
~:>
way of
would
·..·h.:.ch
hold
in
shares
equitable
incl:Jde
the
the
T"JO
tr.ls't
of
P..Al'!.ILTON-
cr through CR ACQUISITIONS,
Defendants
the
has
1 imi ta c ion to
(2,059,COO)
direc~ly
restrain
or
tr:.:s~
construct.i'Je
f
seek,
Cou=~,
this
TAFT now held by ROBERTS, to
would
ARMSTRONG
from
0
as
yet
asset.
than
~P~~.
f:=om
transferri.:1g
:ranspired,
of
fai=
given
!{AXPHARMA,
market
Also,
value
or
such
that
a.nd was by
the
by way of equitable
disgorgement. of HAMILTON-TAFT steck held
ORIGINAL PETITION, APPLICATION FOR
TE.KPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TE.JWORARY AND PERKA.N"fNT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 55
by
or
ROBERTS
ROBERTS
any
individual
affiliaced or associated,
is
or entity
corporation
that
~it.h
which
Court set aside
this
any such conveyance of the HAMILTON-TAFT stock. 92.
ARMSTRONG'S successful prosecu't.ion of
TAFT,
therefore,
and
expenses,
AlL'{STRONG
inc ludi..ng
c~e
is
en't.i tIed
reasonable
AR~STRdNG
connection,
compensate
would
the Ten
show
that.
($125,000.00)
~rosecution
~~S~RONG
a
acti.on will
and HAMILTON-
reimbursement
In
fees.
reasonable
of
this
fee
to
undersigned attorneys for preparation for trial of
Dollars
Thousand
to
att.orneys'
this cause in the amount of One Hundred No/100
~PHARHA
substantial benefit to both
result in a
this
of
and
t.hat.
~~enty-Five
the
expenses
Thousand and incurred
in
this suit are expected to total in excess of
Dollars
(S 10,000. 00),
for
which
further
sums
seeks reccver/. COUNT TWO
Breach of Fiduciary Dutv
93.
Pursuant to Tex.R.Civ.P.
realleges
by
reference
58, ARMSTRONG incorporates and
numerical
paragraphs
1
through
and
including 72. 94.
Due to t~e incorporation cf ~~PHARMA in Tennessee, and
the incorporation of adhere to the them as
rJL~ILTON-TAFT in California,
fiduciary duties
Defendants must
and responsibilities imposed upon
prescribed by Tennessee and California law.
The duties
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER,
ex
PAR~,
APPLI~\TION
FOR TEliPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 56
responsibilities
and
only
to MAXPHARMA, as
HAMILTON-TAFT 5 i mil a r 1 y ,
the
California
law
California
imposed
by
as
a
Tennes see
a
wholly-owned
d uti e 5 would
corporat.ion,
but:
of
subsidiary
only
not
to
also
to
apply
but' also
corporation,
res ~ 0 n sib i lit i e s
and
apply
law would
Tennessee
not
as
to
HA..XPHARHA.
im po sed
un d e r
HAMILTON-TAFT,
~PHAJUof.A,
its
COSTELLO,
LITCHFIELD,
as
a
controlling
parent corporation. Specificaliy,
95. P~SAD
upon
in
have
them
violated
as
discharge
duties
those
and
as
ac~ing
dut.ies
t.heir
directors
good
in
similar ci=c'..lIIlst.ances; be
to
in
r.he
addition,
Defendant.s,
Tennessee
Code
part:icipated
and
did
bes t
in
act
interes t.
imposed
in
transactions
cf
which
i.n
they
with
the
did
care
not: an
would exercise under
a
i.n
manner
the
LI7CHFI~!..O
548-18-302,
Annotat.ed
nor
posit.~on
not.
COSTELLO,
~PHAR.."!A
of
faith,
ordinarily prudent. person in a like
=e 1 i. eved
~esponsibilities
and
preser ibed by Tenne!!see Cede A1lnota ted S48 -18-30 1,
while
that.
Defendants,
reasonably
corpora tion.
and
PRASAD
that
these
:hey had
a
In
°Jiolated directors
conflict
of
in:erest bue did not meet the following dut.ies: a.
The
material
directors or officers to
the
facts
t.he
transaction
and
the
interests were noe disclosed or known
Board
of
Di=ectors
and
the
Board
Directors
of
0
f
or
committee
of
the
Eoard
Directors or committee did
authorize, approve or ratify such t.ransactions;
PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR TEXPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEKPORARY AND PERKAHENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 57
of
not
b.
The
the
the
of
fac':.s
in~eres~s were
or officers
directors to
mat.erial
entitled
shareholders
to
transaction
and
not disclosed or known vote,
they.· d'id
and
not
authorize, approve or ratify t~e transaction; and
c.
The
transac~ions
Defendant.s
96.
Tennessee
those requirements set
to
directors
LITCHFIELD
and and
L::'C~F!::LD and
COSTELLO,
Annotated
Code
were unfair to the corporation.
§48-18-3032
~orth
officers. PRASAD
suc~
in
not
violat.ed follcwing
it relates
Code as
to loans
Defendants
COSTELLO,
the
unlawful
liable
=e
by
(1988)
Acc==dingly,
would
PRASAD
for
distributions as set forth in Tennessee Code Annotated 548-18-304 (1988).
Defendant.s
Tennessee
Code §48-18-403
~P?'-AJU4'..A
but
·... ith
the
did not:
care
thei= duties in~erest
under similar
in a
manner
:':1
that
t:-tei..~
PRASAD
violated
they were officers
cuties
in
good
pruce!"'.t ;:erson
in
a
circ-..:...~s~ances;
faith;
of nor
like
position
and did not
exercise
r€asonably believed to be in the best
of the corporation.
97. COSTELLO,
Additionally, LITCHFIELD
Cede §309 with respect and
exercise
and
:":TC:iF!E:L..D
(19BB)
crdinarily
an
would exerci.se
COSTELLO,
officers
of
and ~o
and
in
PRASAD ~he
California
-:he have
dut.~es
alternative, -.·iolated
ot
~ood
corpora-:ions.
Defendant.s
California Corp.
faith
These
for direct.ors Defendants
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAlNING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.KA.NENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 58
did
not
ac~
the
best
interest
of
the
corporation
including reasonable inquiry, a like
~hich
in good faith or in a manner
~osition
S310.
Defendants
corporation
and
shareho Ider or di~ec~~rs
!h~eholders,
its
an ordinarily prudent person in
violated
Defendants
0
California
Corp.
Code
participated in or were present at a Boar1 of or transactions bet...,een t.he
meet. Lng ..... herein contracts
Di=ec-:crs
or
would use under similar circumstances.
Likewise,
98.
as
they believed to be in
one
or
f': icers
more
of
i-:.s
had a rna ter ial
Directors, financial
controlling
interest:.
The
additionally failed to fully disclose or make known the
direc'tors'
financi.al
interest
to
shareholders
the
and
seek
approval of the t=ansaction by the shareholders, while excluding from
the
vote
officers
of
i:lf:Jr;:1at:ion disc~~se
vote
by
the
shares
ccnt=alling
and
thei=
those
::el.iei, in:eres~
Soard
by
interested
shareholders.
the
transaction and
Di=ectors
transaction while counting the
approving
vote of
conc=olling shareholder or officer,
the
Defendano:s,
COSTELLO,
violated California Corp. t.hose
presc=ibeci
dut.ies
~ode
f:llly
t::::l
in a
par~icipated
such
contract:
or
interested direc:.or,
corpor~tion.
LITCHF!ELD
§31S,
imposed
failed
upon
and such transaction was not
just and reasonable or for the benefit of the 99,.
directcrs,
Additionally,
Defendant: direccors
in the
of
owned
and
PRASAD
also
in that they did not follow
..... ith
respect.
P~NTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
to
loa.ns
t.o
Page S9
or
guaranties
of
obligations
security of corporate shares. acting loans
as
directors
of
the
c:Jntrolling
and
direc~ors
of
officers,
or
on
Specifically, the Def'ndants while
officers
corporation
or
to
of
the
various
shareholders without
corporation approved
directors, of
disclosure
officers
the
and
transactions
and approval of the shareholders and/or the directors as
required
under California law. 0 e f eon dan t
100. The 5
h are hal de r
ent.ities entities
or
a
to
101. Defendants looting
subsidiary,
borrowing
a
d ire c t. 0 r or
by
S
0
r
con t r
0
f
MAX P HA R.."'tA
concert
in
·,.,ith
~XPHAR~
t.o
their
use
0
r
said
ability
t~eir
alone
and/or
The
off':'cers
dominant:
and
the to
or
were misappropr ia t.e
of
act.i~i~ies
a
manner
detrimental
breached
thei:=-
fiduciary
in
and/or
directors
power to control corporat.e
to
the
MAXP~~.
have the
assets
HAMILTON-TAfT.
and/or
manner.
of
~PHARHA
~hat
misappropriation
of
and
through
the
knowing
duty
itg
corporate
and
assets
the
which
and which
intentional
use
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
by
wholly-
looting consisted of
Plaintiffs believe Defendant.s never intended to repay,
P~NT!FFS'
11i ng
0
fiduciary responsibilit.y to
equitable
minority shareholders of
o\o.l1ed
have
shareholders
themselves
sysr.ematically
and
5
controlled
of
and
may not use
benefit
dam ina n t a n d /
and its wholly-owned subsidiary, HAMILTON-TAFT,
just:
C8:1c:-olling
as
off ice r
shareholders
fair,
~~r~~~
r
individuals,
con~rol ~~PHARMA
in
0
indi . . . iduals
or
minority
a nd /
5
5,
Page 60
of
•
fraudulent.
misrepresentations.
In
Defendants,
addition, f
COSTELLO,
their
LITCHFIELD
as
duties
and
directors
properly
PRASAD
failed
and/or
officers
in
disc::harge
to
MAXPH.A.fUI...A.
Such
duties included, but. are not limited to, the dut.y to act in good faith
and with
would
position manner he
care an ordinarily prudent person in a
exercise
to be
Defendant.s COSTELLO, st.andards
these
Plaint.iffs
similar circumst.ances
under
reasonably l:elieves
cor;=oration. meet
the
~PHAR...U.A
and
and
their fiduciary duties,
in
in the best interest: of
a
the
LITCHFIELD and PRASAD did not
breached
A..FJof-STRONG,
their
both
fiduciary
duties
individually and
to
as
a
Furt.hermore, these Defendants breached
~~PPJUl~.
shareholder of
and
like
in :hat they participat.ed in transactions
concerning the corporation in which a director or officer of the cor;:oration LITC:::IELD
the
and
PRASAD
material
CHRISTIANA,
not
fact.s
ent.itled
authorize,
addition,
such
Defendant.s
had
indirect:.
such
indirect.
breached of
indirec-:: their
interest.
fic.uciary
transactions
:he
t.o
or
appro\re
breached
int.erest:
In
vote.
transactions
Lastly,
an
or
COSr2:LLO,
duties,
concerning
Ln
VISION,
in
interests were
addition,
ratify
were
these shareholders
such
unfair
to
their
fiduciary
the
transactions
not made
transactions. the
duties
known to
!n
corporation.
because
stated above,
they and
the shareholders
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORD2R, EX PARTE, APPLICATION FOR nKPORARY AND PERKAHEJIT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
~RARY
i
that
and HAD! 0_ -were not'. disc losed or knoown t.o t.he
ROBERTS,
shareholders
did
direct.
a
had
Page 61
entitled to vote in MAXFHARMA.
As a direct and proximate result,
the
actual
Plaintiffs
have
suffered
damages
e~ce5s of
in
514
million for which Plaintiffs seek recovery. 102. By
vir~ue
of the willfull and malicious fraudulent acts thei~
of the Defendants and their breach of
c:y
':ohern
to
e!ltitled to
the
Plaintiffs
and
it.s
fiduciary duties owed
subsidiaries,
recover exemplary damages.
Plaintiffs
P lainti f fs
show tha t
are an
award of substantial exemplar! damages is necessary to serJe as a det=iment
to
such
unconscionable
conduct.
Accordingly,
Plaintiffs hereby seek recovery of exemplarj damages in an amount in excess of the minimum
ju~isdic~ional l~its
of the Court.
COUNT THREE
Consoiracy ~o
103. Pursuant. =e~lleges
Tex.R.Civ.P.
by reference numerical paragraphs 1 t.hrough and 72.
L04. De fendants '.ral'.Je of
58, AR.'l-5TP.ONG incorporates and
Plaintiff
ent.ered
int.o
AR.."tSTRONG'S
a
conspiracy
invest.:nent
to
diminish
the
in MAXPHARHA and also
entered into a conspiracy to loot the assets of MAXPHARMA and its who lly-owned subs idiary, Plaintiffs,
all
to
Ail"'!STRONG,
both
Defendant.s
acted
HAMILTON-TAFT,
in a
CO!tUTlon
and
as
a
carried
out
in
0
f
shareholder of l'f..AXPHAR.MA.
design in concerted action to loot
the assets of MAXP~~ and its subsidiaries. was
g~in
and detr:-rnent of MAXFHARl"'..A and to
the damage
individually
for the personal
overt
acts
by
This common design
Defendants
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAlNING ORDER, EX PARTE, APPLICATION POR TEMPORARY ANTI peRMAN"eNT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTTVE TRUST
through
Page 62
systematically making personal loans to Defendants. Defendants
designs were carried out.
common
I
divestment and alienation
and forgiveness of f
no~es
payable. shares
addi tion,
De fendan ts
actions
~.AX?H.AR-'{A
and
minimal
0
its
I
subsidiary
jurisdiction~.of
105. Specifically,
in ov,r1;
acts
by
from MAXPRARMA of HAMILTON-TAfT_shares
ARMSTRONG'S
val ue
In addition,
Defendants' actions caused the in
MAXPHARHA
caused in
damage
to
dec 1 i ne .
and detriment:
amount:
in excess
Tennessee
common
an
In to
of
the
law,
the
Cour~.
this
pursuant
to
Defe~dants
committed a civil conspiracy to diminish .the value af
P1a i
A Rl-f..5TRONG • S
n t. iff
assets of
~~PHARMA
51..:::5
id':'ary,
uniat,,;ful
or
means,
un~awiul ~urpcse,
subsidiary, Defendants loo~ing
in
MAXPHA.R.MA
and its wholly-owned subsidiary
looe.
to
and
the
~~ILTON-TAFT
in that the Defendants conspired to commit an
for personal gain,
unlawful pur?ose,
inves t:nent.
that of looting the assets of
sought in
accomplish
to
that
the
Defendants
legitimate
a
conspired
that of looting the assetS of
HAMILTON-TAFT,
conspired
to
for
commit
personal an
~~p~~
purpose
by
c::mrnit.
an
~~p~~
gain,
unlawful
to
and its
in
and its
that
purpose,
that
the
of
the assets of MAXPHARMA and its subsidiary, or sought to
acc::mplish a
legitimate purpose
by unlawful
t.he Tennessee corporate law and acted cc~~it.ting
overt
ac~s
means,
in ·.riolating
in a concert of
action,
and for a common design.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR ttMPORARY AND PERHANEHT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTrvE TRUST
Page 63
106. In
addition
in
conspiring
and
combining
conspiring to loot. the assets subs idiary J all
to
to
HAMILTON-TAFT,
the
~~TRONG
damage
di=ectors
and
direct.ors
approval I
and
exorbitant.
to
of
for
do
a
civil
Defendants
wrong,
that
of
its wholly-owned
personal gain of of
the
law, fn agreeing
MAXPH.AJUI.A and
detriment:
the
Def endants I
MAXPHARMA and
Plaintiff
anc cont.rolling shareholders wit.hout.
of
the
other.. . ise
by
and
salaries
shareholders looting
bonuses
sha.reholders,
controlling XAX?~~,
alternative,
in violating California corporate laws regarding loans
officers,
specific
the
civil conspiracy under California
ccmrnitted a and
and
all
to
non-int.erested
corporat.ion and
the
of
or
officers,
the
the
damage
paying
direct.ors
and detri.rnenr.
arid of
KAMILTON-TAYT and ARMSTRONG. COUNT FOUR Fraud t.~
107. ?ursuant realleges
:Jy
Tex.R.Civ.P.
reference
~~STRONG
58,
numerical
incorporat.es and
paragraphs
1
through
and
including 106. 108. As set
for~h
to Tennessee common
and
concealments
equitable
of
la~,
which
duties,
shareholders
above,
that
Defendants committed fraud pursuant.
in committing fraudulent acts, omissions involved as
M.AXPHAR.M.A"
a
breach of
directors, and/or
their and
officers
breached
the
legal
controlling
trust.
and/or
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRA1NING ORDER, EX PARTE, APPLICATION FOR tt.KPORARY AND PERMANENT INJUNCTION, AH'O
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 64
confidence placed upon such Defendan~s as director~, officers and ccn~rolling shareholders
to
~AXPHARMA
and
of
shareholder
of
l"'-A.XPHAR.."i.A.
~XPHARM.A.
its
a~d
shareholders
AR~STRONG,
and of
MAXPHARJ-f...A.
resulted
c::mcealmenl:.s
All
the
ccmmitted
actual
c:=:""cealments, ~.I_~X?!iAR~
rerna ining ac"=.,
its
their 0
all
to
subsidiary,
a
the
the
law,
in
f
an
!-!A.XPf-:..A..RJ-f...A,
and
as
in excess
the
act.s,
a
and o~
Defendants
omissions
and
injury
of
both
under
intentionally
and
caus ing
the
f
~PHAR...1 {A
not
HAMILTON-TAFT
and
inducing
~PHARMA,
individually
and
in
California
regarding
and
and shareholders
alternative
fraud
misrepresentations va~:ous loans
0
Cour~.·
HAMILTON-TAFT,
thereby
direcr;ors
ARMSTRONG,
110. In
5
omissions
aCl:S,
their
by
of
Plain~iffs
Tennessee
,,",hereby
actions,
f fleers,
Plaint.iff
committed
fraud,
resulting
taken
a
they systematically looted the corporate assets of
and
c::::1cea led
under
ass e t
individually
such
minimal jurisdictional limi ts of this r09. Additionally
t:J
being
both
injury to
in
co rpo r a ~ e
the
as
through
Defendant.5,
HAMILTON-TAFT
unconscien~ious advan~age
HA1-!ILTON-TAFT
t~e
subsidiary,
and
individually
100 ted
injury
in
re!lultf!d
Specifically,
s Y5 t em a tic a 11 y
undue
both
ARMSTRONG,
va rio usa c ~ s, and
which
MAXPHAlUC'..A,
their
0
and
addition, laW',
aC1:S
in
and
on
behalf
the
Defendants
that
the
omissions
af
material regarding
to direct.ors, officers and controlling shareholders
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
~ORARY
FOR ttMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 65
~..A.X?HARMA,
cf
making
false
representations
conce'aling such
and
I
loans ·,.;hich and
resulted
in
subs idiary,
its
HAMILTON-TAFT,
knowledge of such fraud, reliance of
good
shareholders ~..AXPHAR."'.A,
of
j~risd:c~~onal
By
of
the
cy
the~
to
a~
serve
the
an
t.he
MAXPF~,
award as
a
their
rely,
to rely upon the upon
=esulting ~ot.h
in
exem;J1ar"l damages.
substantial
dec.errent
the
damage
to
Caur~.
fraudulent. acts
fiduciary duties owed Plaint~ffs
Plaintiffs and thei= subsiciaries,
of
~hich
individually and as
of the willful and malicious
r-eccver
t.o
of
in an amount in excess of the minLmal
limits of this
the
violat.ion
and
Defendants,
l"..AXPHARHA... did
vir~ue
Ac=~rc~~gly,
i:1
of
Defendants and their breach of the
e~:.i':.':ed
t~at.
in
of l-"-A.XPHARMA
with the intent to cause the inducement
HAMILTON-TAFT and A.RMSTRONG,
a shareholder of
~:i.
and
assets
shareholders of MAXP?.ARMA,
the
act.ions
:aith
the
failing to disclose such fraudulent acts, with
fiduciary dut.ies,
and
looting of
the
Plaint.if:s
exemplary damages
t.o
such
is
would
are show
necessary
unconscionable
to
conduct..
Plaintiffs hereby seek recovery of exemplary damages
~ount
in
excess
of
the
minimal
jurisdictional li.!nics of
C-:::.l!'~.
::~.
In
Annotat.ed
addition,
S48-22-102,
t.~e
in
Defendants selling,
tliolaced
leasing,
Tennesse~
Code
exchanging
or
ot~er~lse
disposing of all or subs~antially all of the assets of
~~PHA~~
ocher than in the usual and regular course of business,
PLAINTIPFS' ORIGINAL PETITION, APPLICATION fOR tt.'U'ORARY RESTRAINING ORDER, EX PARm, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTIon, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 66
•
failing to propose and present to all of the shareholders of
in
lI...AXPHARJoI..A
for
vote
a
the
proposed
01
dispos ition
MAXPHARHA' 5 ~
shares
in
H.A.MILTON-TAFT.
Specifically,
the
Board of
Directors
failed to recommend the proposed transaction to the shareholders
or
other~ise
allew
communicate such transaction to the shareholders to
shareholders to vote on approval of such transaction.
the
the corporat:cn
Addi.~ianally,
of
proposed
a
shareholder's
or::er ta cons ider the sale, ~he
af t~.e
HAMILTON-TAFT
Defendants
shareholders of
~p~~
to
not.ify each shareholder
meeting with lease,
stock.
breached
failed
requisite
in
exchange or ot.her dispas i tion
Accordingly,
the
fiduciary
their
notice,
sale is
void and
duty to all of
the
pursuant to 548-22-102 of the Tennessee
C::ce Annot.at.ed.
comrr PIVE Plaintiffs' Entitlement to Injunctive Relief ~13.
Pursuant to Tex.R.Civ.P.
real!.eges
by
reference
58,
numerical
~~TRONG
incorporates and
paragraphs
1
through
and
incl.uding 112. 114. Plaintiffs would show t.hat Defendants have entered into a
c~urse
assecs
of conduce which has of
adci-:':"on, way a f
uses
MAXPHARMA
the
loans
and
looting of made
syste~atically
subsidiary,
its the
corporate
looted the
co~orate
H.AliILTON-TAFT.
as!et.!!
hag
been done
In by
to the De fendants for the Oefendan~.!!' personal
and by way of
divestment
from
MAXPHARMA of
its
principal
asset (viz., HAMILTON-TAFT). PLAINTIPFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
T~RARY
POR TEMPORARY AND PE~ INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 67
con d u c t
115. The
capacities
as
De fen dan t s,
oft h e
officers,
directors,
e i the r.
in
the i r
shareholders,' controlling
persons, and encities or individuals in aid and concert thereof, as manifest and evident thrcugh the concerted course of conduct since January, and
rape
pr~~ary
caused
the asset
to
1988, assets
through and
including
be
of MAXPHARMA (viz.,
reckless-1y
di'lested
failure of
and
disburse
alienated
the Defendants
HAMI~7CN-TAFT)
:::-om
funds
t~e
Ccur~
the
~PP.AR.."1A,
patent.ly eStablishes
of injunctive relief,
t.he
has
successfully
c~her
the
first
combined with
for
need
par~icularly
impaired
been
HA.'iILTON-TAFT
in their capac:ties as set
al:=gatians which have been asserted in ·... hi::~
loot
to permit its shares
thereai~er,
from
has
to ?roperly account and protect for the interest of H.A1'!ILTON-TAFT,
to
of MAXPHA..RM.A through a process ,-,hereby the
CGNC£NTRATION ACCOUNT FUNDS and, t:l
the present,
for~h
thl:!
above
MAXPP~~
and
impos ition
by
in view of previous litigation,
none of
deliberate
Jngoing
and
wlllfall plan and scheme as demonstrated herein. 116. Plaintiffs
is
i.n
immediate
accordingly
danger of
reason of the conduct on the on
~ehalf
of
Oefendan~s
i~~diate threat
value
to
the
of
as
loss par~
set
substant.ial
HAMILTON-TAFT
show
'that
and/or
the
MAXPHAR."'!A
diminution
of the Defendants.
in
stock
value
by
The conduct
for~h
herein poses
harm,
injury and diminution and
st:.ock,
as
~ell
as
to
a c lear
the
~PH.A.RMA
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
~ORARY
POR ITKPORARY AND PERKANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Paqe 68
stock.
The potential
b~
loss, harm and injury cannot
accurately
measured; therefore, Plaintiffs are without an adequAte remedy at law.
rf
the
funds,
obtaining
HAMILTON-TAFT, ~PPJUl~
act.i-ons
Defendants
by
are not restrained or
loan
ot.herwise
and are not enjoined
and
from
enjoined
MAXPHAR..1ofA
from
and/or
from attempting to pledge
or HAMILTON-TAFT stock, they will continue to take such
which
A..R."!.STRONG,
are
bach
i.ncluding
detrimental
and
indiVidually and
without
as
limitation
to MAXPH..AR1-''}' and
damaging a
shareholder of
rendering
~PHARHA,
disgorgement
and
re?lacement to be impossible to implement or remedial measure to rest:ore and preser..re
~PH.ARMA
and HAMIL:'ON-TAFT and t:J.e equity
interests of shareholders therein.
Such damages and injuries are
and to a large degree are
cont.i-nuing
incalculable.
Plaintiffs
have no adequate remedy at law. ~H=:REFORE,
bot~
1.
i:1
CONS IOEREO,
:!AXPHARMA
incividually and as a shareholder cf
~ray tha~
shall
PRE~ISES
~he
and
AR..'"!STRONG,
~~PHARMA, respec~:ully
Court:
Enter an order directing
t.hat t.he Clerk of this Cour-c.
forthwith issue a Temporary Restraining Order, to continue
effect until
the
conclusion af
rnj~nc~ion hereinafter
rest.raining ser-.·ant.s,
and
hearing
on the Temporary
set, or until furt.her Order of this Court,
enjoining
employees,
the
Defendant.s,
and attorneys,
and
their
officers,
those
persons
agents,
in active
P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION FOR nKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
TEMPORARY R..ES'I'RAlNING ORDER,
Page 69 ----
concert receive
or
participation
actual
notice
of
with
the
persons
such
or
entities
Temporary Restraininq I Order,
who from
the :allowing:
a.
Directly
other.,-ise
indirectly
or
transferring,
obtaining, by
whether
loan
acquiring or
or
otherwise,
singularly or in combination, any funds or assets of VISION, CR
ACQUIS ITIONS,
',.,.i thou t
limitat.ion
the
FUNDS or any funds
to
any
of
the
other
., FUNDS")
and/or MAXPHARHA
HAMILTON-TA..F~
including
HAMIL:'CN-TAFT CONCENTRATION
ACCOUNT
or assets cist=ibuted from HAMILTON-TAFT
Defendants than
s':"nce
the
in
December and
normal
15,
1988
(the'
ordinary course
of
business and for adequate consideration: and b.
En~
any
security
~~~ILTON-TAFT
c.
int.erest,
with
1988,
of
grant
any
to
mortgage or
:'ien,
s~=ck
the
requiring
distributicn
monies
from
the
ACCOUNT for any purpose other matters,
to
transferring, third
any other
of either MAXP~~ and/or
and/or on the FUNDS.
Mandator i1y
involved 15,
attempting
encumbrance on the
of
assigning,
indirectly
or granting or
pledging
t=a=t.y
or
Directly
t:hat: at
any of
any
time
the
De fendant.s
since
December
HAMILTON-TAFT CONCENTRATION
~han
the payment of client tax
including without limitation in re~pect thereto the
distributions made on February 14 and February 15,
1989,
in
the amoants of 52 million and 51.5 million, respectively, be
P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER,
ex
PARTE, APPLICATION
POR TEMPORARY AND PERHAHEN1.' INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 70
required to reverse said transac~ions and restore
the funds
,
to
the
HAMILTON-TAFT
ACCOUNT until
CONCENTRATION
further
order of the Court:
d.
Mandatorily
requiring
the Defendants
any of
that.
involved with the sale or transfer on or about February la, 1989, of any shares of KAMILTON-TAFT stock from ~~PHAR¥A to
any
of the Defendants
o~her
A.CQUISITIONS, . or
~~cluding
third-par-:y
without limitat.ion CR
individuals
or
entities
be
to reverse said transactions and restore any such
required
HAMILTON-TAFT stock
MAXP~~ un~il
to
further or=er of
the
Court;
e.
Altering,
relocat.ing from irnpai=ing
the
documents
of
transfer fro m
of
their
normal
location,
Defendants
asset.s
any
MA XP HARMA
0
r
or
concealing,
or in any otherJise
any
of
the
records or
relat.ive
to
the
receipt
discoverabiii:y the
destroying,
modifying,
of
?r=:perty since
HAM I L TON - T AFT ,
January
inc 1 u din g
1,
or
1988,
wit. h 0
U
t
limitation in respect thereto any funds distributed from the HAMILTON-TAFT CONCENTRATION of
MAXP~~
or HAMILTON-TAFT,
in respect t.heret.o, records the
ACCOUNT
the
st.ock
particula~ly
with respect. to accounting
evidencing t:te distribution of any funds
affiliated
~ith
regis~ers
but not by way of limitation
Defendant.s and any enti:y or
P~NTIFFS'
or
individual
to
any of
associat.ed or
or controlled by any of the Defendant.s.
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR T"eXPORARY AND PERHAHENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 71
upon
hearing,
restraining
trans fer=inq and/or
J.
1 ien,
agents,
at.t:orneys,
funds-, and
by
representatives othe~Jise
acquiring or
loan or other-rise, assigning,
from
and
from
MAXPH.AR.MA
transferring I
pledging
me rtgage,
or ather enctL"':'tbrance on the
HAMILTON-TAFT
st.ock
a
pending
MAXPHARJof.A
hearing
on
tl1e
Injunction; That
that
upon
Defendant.s, damages
their
issued enjoining
or attempting to grant. to any third party a securi:y
and/or
Pe~anent
be
Injunction
indirectly obtaining,
HAMILTON-TAFT
in t.eres t.,
and
or
any
g~anting,
stock
Temporary
Defendant.s
directly
from
or
a
,
to appear and !lhow cause and that
be cited
Defendants
2.
Defendants final
trial
jointly and
f:;r
the
be
cited hereof
severally,
violation
of
a;:pear
t.o
eno:er for
a
actual
~hei=
and
ans'''''er
Judgment.
herein against:
and ccnsequential
fiduciary
duties
t~
Plaincif:s; "'. ac~ual
:udgment: against Defendant.s,
for
and consequential damages arising cut of Defendancs' civil
cons~iracy
5.
jcintly and severally,
against Plaintiffs:
Judgment
consequenc.ial damages
against
result.ing
Defendants from
for
the willfull
actual
and :nalicious
fraudulent. conduct. of Defendants:
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 72
6.
Judgment against Defendants,
exemplary civil
resul tinq
damages
conspiracy,
and
breach
from of
jointly and sev~rally, for fraJdulent
Defendants'
~heir
fiduciarf
acts,
duties· againsl:
Plaintiffs; 7.
Attorneys'
fees in a reasonable amount as dete~ined by
the Cour'C. 8.
Costs of suit;
9.
Interest
after Judgment
as
provided
by
law
from
the
date of Jucgment until paid; 10.
Such other and
further
=,=1ief to which Plainl:iffs may
be justly entitled. Respec~fully
submitted.
C;:::DWIN, CARLTON ,
MAX"J'lELL
I~~~\ill.l-~~
By:
DAVID N. EVERETT
Bar Card No. 06745:00 JOHN C. BUSH
Bar Card No. 034962~O 3300 NCNB Plaza 901 Main Street Oallas, Texas 75202-]714 (214) 939-4400 A~ORNEYS
FOR PLAINT!F'!'
CONNIE C. ARMSTRONG
PLAJNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRA..INING ORDER,
EX PARTE, APPLICATION
FOR TE.KPORARY AND PERKA.HEHT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 73
VERIFICATION STATE
OF
TEXAS
S S
COUNTY OF DALLAS
BEFORE
ME,
§
the
undersigned
personally appeared CONNIE C.
Notary
Public,
on
known to me,
ARMSTRONG,
this who
day
being
duly sworn on his oath deposed and said that he is over the age of
twenty one
this
years,
(21 )
Affidavit;
that
Plaintiffs
Original
Restraininq
Order,
Permanent
filings
Ex
Trust,
and
securities
has
Parte, and that
by MAXPHARMA in the
similar
sound mind and competent to make
f
read
Petition,
Injunction,
Cons tructive
he
0
the
above
Application
Application
for
and
foregoing
for
Temporary
Temporary
and
Imposition
of
Application
for
based
review of
on
his
form of 10-Q'5,
filings,
as
well
13-D's,
as
pertinent and
lO-K's,
conversations
with
COSTELLO and BARTLETT, as further augmented by pleadings filed in the
MAXPHARMA/ROBERTS SUIT,
and
including without
limitation
in
respect thereto the proceedings with regard to injunctive relief conducted
therein
and
conjunction with his this
testimony
personal
provided
knowledge,
pursuant
the
theret:o,
in
facts contained in
Petition are within his personal knowledge and are true and
correct.
" /
·1
,
." ,/
I
,
I
/ ~ ."~ , '-- -6' .. ...t::".
eONNIE C. ARMSTRONG.
// PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERKAHEHT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 74
SUBSCRIBED AND SWORN TO BEFORE ~, by CONNIE C. ~~TRONG on this
/~z::l.L day of FebruaryJ 1989, to certify which wit'hess my
hand and official seal of office.
NOTARY T~E
~UBLIC
STATE
~fPed/P~inted
~y C~mmis5ion
IN AND FOR OF TEXAS
Name of Notary:
Expires:
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 7S
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Document Links: Start of Document CASE SUMMARY PROCEDURAL POSTURE: OVERVlEW: OUTCOME: CORE TERMS: LexisNexislRI Headnotes COUNSEL: JUDGES: OPINION BY: OPINION:
176 B.R. 895, "; 1995 Bankr. LEXIS 45, SHEPARD'~
~;
32 CoWer Bankr. Cas. 2d (MB) 1727; 26 Bankr. Ct. Dec. 665
In re HAMILTON TAFT & COMPANY, Debtor. FREDERICK S. WYLE, Trustee of Hamilton Taft & Company, Plaintiff, VS. HOWARD, WElL, LABOUISSE, FRIEDRICHS INCORPORATED, a Louisiana corporation; HOWARD WElL FINANCIAL CORPORATION, a Louisiana corporation; and LEGG MASON, INC., a Maryland corporation, Defendants. Chapter 11, No, 91-3-1077-TC, Adv. No. 93-3-121-TC UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA 176 B.R. 895; 1995 Bankr. LEXIS 45; 32 Collier Bankr. Cas. 2d (MB) 1727; 26 Bankr. Ct. Dec. 665; 32 Oil & Gas Rep. 1727
January 18, 1995, Decided January 19, 1995, FILED
CASE SUMMARY PROCEDURAL POSTURE: Chapte~ II bankruptcy trustee brought an aC1:ion to recover, a! a fraudulent conveyance, transfer! mad" by defendant pursuant t.o a reverse repurchase agreement used to facilitate Co leverag~d buy cut under 11 U.S_C.S, § 546{e:.
OVERVlew; Chapter 11 pursuan~ (~ C
reverse
ban~rup[cy r~purcha5~
brought an aCLion to recover. es c fraudulent conveyance [ransf~r~ mad~ by defendant cgreement used to tacjli~ate leveraged bUyou!. The ~ourt held that the Ban~rup[cy Cede ICodel,
tru~~ee
j
l' U.S.C.S. § 546lel, prevented t.ruste~ trom recm,oerin9 such transfers. ThE: transaction in which debt.or sold a trea'!;ury bill to defendant u!te~ agreeing LO repurchase the bi11 came within the broad definition of settlement payment under ~ht Cooe, 11 U.S.C.S.§ 546(e!, defining settj.ernent payment as an}' transfer of cash or secu=it.ies c:ompletinQ G securitie.s tI"ansactlon. Fur-t.hern,ore, even :if defendant knew that transactiofl was pert of C: leverogeri buyout~ the transact:ion could not. be recovered c!: g fraudulent transfer because th~ (Dd~, § ~46(e)f barred recover, of settlement payments more [han one year pre-petition irrespective of ':Jefendant"'s mental sr,atf"!. The co~rt a150 hf!ld that the Cod~, 11 U.S.C.S. §544(bl , deprived trustee of ~tanjing :;0 assert ~ clainl for aiding end cbetting a fraudulent transfer.
OUTCOMe: The Bankruptcy Code barred trustee's fraudulent transfer action. The transaction
~here debto~
sold defendant a treasury
bill after ilgceeln9 Co repurchasl:' th~ bill came wit.hit; the Bankrupr.q.' Cooe'!; definit.1on of sett]em~nt pa}"ment. Even If Knew that ~n~ ~ransactio" wa~ ~art of Q ie~eraged buyout, no reccvery was possible b~cause the Bankruptcy Cede barred pa~~ent recovery one year po~:-petition.
d~fendant se~tlemenl
CORE TERMS: repo, settlement payment, stockbroker, commodity, broker, aiding and abetting, shareholder, transferred, settlement, fraudulent conveyance, summary judgment, handling, fraudulent transfer, stock, forward contract, clearing, merchant, reverse repurchase agreement, repurchase agreement, present action, prepetition, undisputed. repurchase. buy. dealer, chain, legislative history, cause of action, insolvent, defraud LexisNexis(R) Headnotes .. Hide Headnotes Civil Procedure> Summary Judgment:> Standards:> Legal Entitlement
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Civil Procedure> Summary Judgment> Standards> Materiality HN1Summary judgment lS properly ± Judgment as a matter uf laM.
granted when there is no genulne issue of mater1al
f~ct
and the moving party is
entJ~led
La
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN2 See the Bankruptcr Code.
±
11 U.S.C.S, § 546 (e) .
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power 11 U,S.C.S. § 546 (e). to protect thl;< nau.on' 5 financial markets from the instability caused by the reversal of settled securitles transact lOriS .
HN3 Congress enacted Bankruptcy Code,
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN4 Repos and Reverse Repos are securities transactions covered by Bankruptcy Code.
11 U.S.C.S § 546 (e) .
! Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power
=
a Repo arrangement, the dealer sell~ specified 5ecuritle~ to purchaser, but also agrees to repurchase the securi~ies later at the original price, plus an agreed upon additional amount usually representing interest on the original pu~chase price. A Reverse Repo basically is the reverse: the dealer buys securIties and agrees to resell the securities to the seller in the future. Reverse Repos can function as a loan. The seller receives cash for the securities, but must repurchase the securities in the future at the same price. Thus. the securities sold to the dealer can be viewed as being colla~eral far a loan.
HN51n
+
~
Bankruptcy LaW> Case Administration> Examiners. Officers & Trustees> Limitations on Trustee's Power HN6 Whether a transaction is
±
a Repo or Reverse Repo covered under BanJ:ruptcy Code, 11 U.S.C.S. § 546 Ie l, is
HI
be governed by an
objective test.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN7 Severa 1 courts have also held tha t
±
Bankruptcy Code, 11 V.S.C_S. § 546 (e ~,
cover~
unusual as well as rou tine securities
t ransa C"tions.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Umitations on Trustee's Power 11 U.S.C.S.&546(e), does not caver only Repcs and Reverse Repos; it covers all types of secu::-ities transactions. The Bankruptcy Code, 11 U.S.C.S. § 546 (e), includes ;: transfer of securities that completes any securities t ransa etion.
HNBThe Bankruptcy Code,
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power Bankruptcy Law> Liquidations> Clearing Banks, Commodity Brokers & Stockbrokers HN9 See the BanKruptcy Code,
±
11 U.S.C.S. § 741 (8) .
Bankruptcy Law> Case Administration> Examiners. Officers & Trustees> Limitations on Trustee's Power HN20A settlemen~ payment clearly includes
±
a transfer of securities that completes a securities trans3ctlOr..
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN21Settlement payment includes any transfer of cash or securities toward completion of a securities transaction.
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN12 See the Sankruptq Code.
±
11 U.S.C.S. § 546 (f1 .
Bankruptcy Law> Case Administration> Commencement> General Overview HN13 See the Eankruptcy Code,
±
11 U.S.C.S. § 101 (4Ill.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN14Thf' Bankruptcy Code ICode), 11U.S.C.S §546(f), wa!O int.ended to supplement rather than narrow Code, 11U.S.C,S.§546Ie), and a defendont thc;!. qualifies under Code, 11U.S,C.S.§546(el, as i":. 5toc~.broker need not quality under Cede, 11U.S,C.S.G546(fl. as a
±
repc participant.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> Constructively Fraudulent Transfers Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> Elements Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers'> Intent 11 U_S.C.S, § 546 (e}, cont.ains c; limite~ el".cep~ion fo:- cases lnvolv.lnr;Y actual fraUd. Ttl", st.atute does nDt b"r actious brOl:aht under the Bankruptcy Code, 11 U.S.C.S, § 548 (a) {i I, which allows", trustee tu recover c transfer mad(; wi thH, Dne year before the petitlon :late with actual intent to hInder, delaj'. or defraud cre::iitc's. The Ban!;ruptq' Code, 11 U.S.C.S. §
HU15Thf' Bankruptcy Code,
..,
~,
546 (e), does ba::::- actions brought under the Bankruptcy Code, "U.S.C S. § 544 (using state fraudulent com/eyance statutes) ttl reccve:- transfers made mere that; cn(! year prepetitiClJ ...itr, actucl int~nt tt: hinde:, delay, Dr :Jt'fraud cn:dirors.
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nttp:11 Wt:::O.It:X.l~.l;UIIll Jll,;IItl.lJ~t:1 ~CC1.ll.,;l1JUI~l-'UU'- .i:C) .... : _ y,:,u llIb-V"t~U1 .•.
Bankruptcy Law> Bankruptcy Crimes HN16Californi2 courts per~it c credltor to hinder, oelay, or defraud credltOrs.
±
r~cover
civii
damage~
from those who conspire to transfer property of a debtor to
Bankruptcy Law> Bankruptcy Crimes Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Real Property Law> Purchase & Sale> Fraudulent Transfers HN17A debtor's banr.ruptcy trustee is not authorized to pursue every
±
ac~ion
that credirors of
th~
debtor might pursue.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Voidable Transfers> Unsecured Creditors Bankruptcy Law> Claims> Allowance HN1.8 See
±
the Bankruptcy Code, 11 U.S.C.S. § 544 (bl .
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> General Overview Estate, Gift & Trust Law> Trusts> Trustees> Duties & Powers> General Overview
±
trusLee's pDwer to avoid fraudulent trDnsfers does not enable a trusLee to recover damages for aiding and abetting c fraudulent transfer.
HN19A
COUNSEL: [-1] J. Michael Kelly, Esq., COOLEY GODWARD CASTRO, San Francisco, CA, OF COUNSEL. Thomas K. Potter, Ill. Esq., JONES, WALKER, WAECHTER, POITEVENT, CARRERE & DENEGRE, New Orleans, LA, Counsel for Defendants, Howard, Weil, LaBouisse, Friedrichs Incorporated; Howard WeiI Financial Corporation; and Legg Mason, Inc. L.J. Chris Martiniak, Esq., FELDMAN, WALDMAN & KLINE, San Francisco, CA, Counsel for Plaintiff, Frederick S. Wyle, Trustee. JUDGES: Thomas E. Carlson, United States Bankruptcy Judge
OPINION BY: Thomas E. Carlson OPINION: [·897] OPINION Thomas E. Carlson, Bankruptcy JUdge. The principal question in this case is whether section 546(e) of the Bankruptcy Code bars a trustee from recovering as a fraudulent conveyance transfers made by a stockbroker pursuant to a reverse repurchase agreement used to facilitate a leveraged buyout. I conclude that there are no genuine issues of material fact and that section 546(e) bars trustee's action, and therefore grant summary judgment for defendant.
FACTS The material facts are not in dispute. On December 3D, 1987, MaxPhanna, Inc. paid Connecticut General Corporation (CIGNA) $ 500,000 for an option entitling it to purchase stock of Debtor Hamilton Taft & Company [....2] (Debtor) from CIGNA for $ 4,100,000. MaxPharma could exercise the option only through January 29,1988. The $ 500,000 option price was applicable to the purchase price, but was otherwise non-refundable. MaxPharma was unable to find a lender willing to arrange financing through a "stock loan," whereby Debtor's stock would be used as collateral to secure the loan. Defendant Howard, Weil, Labouisse, Friedrichs Incorporated (Defendant) informed MaxPharma that it did not make "stock loans," but could lend money with a treasury hill as security by performing a reverse repurchase transaction. On January 28, 1988, Debtor wired $ 5.0 million to Defendant. On January 29, 1988, Defendant used approximately $ 4.9 million of those funds to purchase for Debtor a gO-day T-Bill having a face value of $ 5.0 million. On the same day, Debtor sold the T-Bill back to Defendant for $ 4.1 million, subject to a reverse repurchase agreement, under which Debtor agreed to repurchase the T-Sill in 90 days for the sale price plus interest. What happened to the $ 4.1 million is contested by the parties. Debtor's chapter 11 trustee (Trustee) contends that the $ 4.1 million was transferred directly to MaxPharrna immediately [**3] upon sale of the T-Bill. Defendant claims that it credited Debtor's account for $ 4.1 million, and that those funds were subsequently wired to MaxPharma. For the purpose of the present motion, I accept Trustee's version of the facts. It is undisputed that Debtor transferred the funds to MaxPharma at the request of Debtor and that MaxPharma used $ 3.6 million to purchase Debtor's stock from CIGNA. When the 90-day repurchase agreement matured, Debtor rolled over its obligation into new T-Bills and later into T-Notes. In
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January 1989, Debtor directed Defendant to sell the T-Notes and apply the proceeds to satisfy uebtor's obligation under the reverse repurchase agreement. Creditors filed an involuntary chapter 11 petition against Debtor on March 20, 1992. Trustee was appointed on March 26. 1992. An order for relief was entered on May 31,1992. Trustee filed the present action on March 26, 1993. ~e contends that the transaction involving Debtor. Defendant, and MaxPharrna was in substance a leveraged buyout (LBO), in which MaxPharma used Debtor's funds to_purchase CIGNA's stock in Debtor. Trustee further contends that the transaction rendered Debtor insolvent-and that the LBO therefore r4] constituted a fraudulent conveyance. In the present action, Trustee seeks to recover, pursuant to California Civil Code sections 3439.04 and 3439.05 and Bankruptcy Code section 544, the value of the $ 5.0 million T-Bill transferred from Debtor to Defendant on January 29, 1988, or the $ 4.1 million proceeds of the sale of that T-Bill that were transferred from Defendant to MaxPharma the same [*'898] day. n1 Trustee and Defendant filed cross motions for summary judgment. - - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n1 Trustee previously filed a similar action against CIGNA. That action was settled by the parties before trial.
- - - - - . - - - - - - End Footnotes- - - - - - - - - - - - - •
DISCUSSION
Standard for SummaI)' Judgment HNl+"Summary judgment is properly granted when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau. Inc.. 690 F.2d 1240.1250 (9th Cir. 1982), cert. denied, 459 U.S. 1227. 75 L. Ed. 2d 468. 103 S. Ct. 1234 (1983). [....5]
II Section 546(e) Defense Defendant contends that Trustee's action is barred under section 546(e) of the Bankruptcy Code. That section provides:
HNZ.notwithstanding sections 544, 545, 547, 548(a}(2), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101(34),741(5), or 761(15) of this title, or 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 fnstitution, 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). HN3'tCongress enacted section 546(e) "to protect the nation's financial markets from the instability caused by the reversal of settled securities transactions." Kaiser Steel Resources. Inc. v. Jacobs. 110 BankL 514, 522 (D. Colo. 1990). affd, 913 F.2d 846 (10th CiL 1990) (citation omitted). Trustee does not contest many of the elements of the section 546(e) defense: that Defendant is a stockbroker, that the [**6] T-Bill transferred was a security, and that the present action is brought under section 544. Trustee contends that section 546(e) does not apply. however, because: (i) the transaction was not a true repurchase agreement (Repo). (ii) the transfer of the T-Bill to Defendant was not a "settlement payment," (iii) the present transaction is governed by section 546(f}. and (iv) section 546(e) should not be applied to LBOs.
A. Whether Transaction a True Repo
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Defendant characterizes its transaction with Debtor as a reverse repurchase agreement (Reverse Repo). HN~The Ninth Circuit has held that Repos and Reverse Repos are securities transactions covered by section 546(e). In re Comark. 971 F.2d 322. 325 (9th Cir. 1992) (Comark I); In re Comark. 145 Bankr. 47, 52-53 (Bankr. 9th Cir. 1992) (Comar\< II). HNS'tThe Ninth Circuit has described the characteristics of Repos and Reverse Repos as follows. In a Repo arrangement, the dealer sells specified securities to a purchaser, but also agrees to repurchase the securities later at the original price, plus an agreed upon additional amount usually representing interest on the original [**7] purchase price. A Reverse Repo basically is the reverse: the dealer buys securities and agrees to resell the securities to the seller in the future. Reverse Repos can function as a loan. The seller receives cash for the securities, 'but must repurchase the securities in the future at the same price. Thus. the securities "sold" to the dealer can be viewed as being collateral for a loan.
Comarlc l, 971 F.2d at 323 (footnote omitted). Accord 11 U.S.C. § 101(47). Trustee contends that the transaction between Defendant and Debtor was not a true Reverse Repo, but rather was a sham used to conceaTthe fact that Debtor's funt~s were being used to fund an LBO. Trustee notes that Debtor used $ 5.0 rnlmon cash-tobuya-T-=Biil,-the'r;Tmmedialely sold the T-Bill subject to the Reverse Repo, leaving itself essentially in the place it started. Because there was no net borrowing of funds, which is the essential characteristic of a Reverse Repo, Trustee argues, the transaction is not entitled to protection under section 546(e). This argument is unpersuasive. [*899] First, the transaction constituted a Reverse Repo in the objective sense. [-8) Debtor sold a T-Bill to Defendant and agreed to repurchase it again later for the sale price plus interest. HN6f:Whether a transaction is a Repo or Reverse Repo covered under section 546(e) is to be governed by an objective test. See Comark II, 145 Bankr. at 53. Courts have noted that there are several varieties of genuine Repo transactions. See Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Sav. & Loan Ass'n, 878 F.2d 742,746 (3rd Cir. 1989); Comark II, 145 Bankr. at 50 n.6. HN7+Several courts have also held that section 546(e) covers unusual as well as routine securities transactions. See Comark I. 971 F.2d at 326; Kaiser Steel Corp. V. Charles Schwab & Co.! Inc.! 913 F.2d 846.849 n.6 (10th Cir. 1990) (Kaiser I); In re Kaiser Steel Corp.! 952 F.2d 1230. 1238-40 (10th CiL 1990), cert. denied, 120 L. Ed. 2d 887,112 S. Ct. 3015 (1992) (Kaiser II). Second, whether or not it was a conventional Reverse Repo, the transaction between Defendant and Debtor [-9] was clearly a securities transaction. Section 546(e) HNBidoes not cover only Repos and Reverse Repos; it covers all types of securities transactions. "Section 546(e) ... includes a transfer of securities that completes any securities transaction." Comark 1/, 145 Bankr. at 52. The transaction between Debtor and Defendant in substance reduces to the following. Debtor purchased a T-Bill from Defendant then sold it back to Defendant. Whatever else it was, this transaction was a transfer of securities. See Kaiser II. 952 F.2d at 1239-40 (transfer of securities that is part of LBO is a securities transaction covered by section 546(e».
B. Whether Transfer a "Settlement Paymenf' Trustee argues that the transfers involving Defendant are not protected under section 546(e) because they do not constitute settlement payments. "Settlement payment" is defined in section 741 (8) of the Bankruptcy Code. HN9+"Settlement payment" means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account.. a final settlement payment, or any other similar payment commonly used in L*10] the securities trade.
11 U.S.C. § 741(8). The Ninth Circuit has construed the term very broadly.
HN1C1'tWe now join with the Third and Tenth Circuits and broadly define the term settlement payment. A settlement payment clearly includes a transfer of securities that completes a securities transaction.
Comark I. 971 F.2d at 326 (citation omitted). Accord Comark II. 145 Bankr. at 52.
---
was not a,.- settlement because it did not Trustee first.. argues that the initial transfer of the T-Bill to Defendant . - ,._- --- .- payment '" .. ,.... .. ~--- ~
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complete the Reverse Repo. ~his argument ,is whollY. une~~..!!.~~tve. The clear thrust of both Comark I and Comark II is that HN11 "settlement payment" includes any tr~nsfer of cash or securities toward completion of a securities transaction. See Comark I, 971 F.2d at 326; Comark II. 145 Bankr. at 52. To hold that section 546(e) does not apply to the initial transfer of securities to a broker handling a Reverse Repo would eviscerate section 546(e) and frustrate Congress's intent in enacting it, by leaving the broker open to suit [-11J for doing nothing more than handling a securities transaction for the debtor. n2
t
- - - - - - - - - - ~ - - - Footnotes - - - - - - - - - - - - - - n2 Trustee contends that Defendant's expert witness testmed that the initial transfer of the T-Bill to Defendant was not a settlement payment. This argument fails for two reasons. First, the relevant historical facts are undisputed. The application of section 546(e) to those facts is question of law, not a question of fact subject to expert testimony. See Comark l. 971 F.2d at 324-25. Second, Trustee mischaracterizes the testimony of Defendant's expert, Dr. Marcia L. Stigum. Dr. Stigum's testimony, taken as a whole, supports a finding that the initial transfer of the T-Bill was a settlement payment. Plaintiff failed to submit affidavits controverting that testimony.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - Trustee next
ar~~
that the transfer to MaxPhanna of the $ 4.1 million proceeds of the sale of the T-Bill was not a
~~~.~~Y..m~!!.t~~~.Y§~ ~t,-e..p~y.mW~-'J9l rn~cte.!qJ:)~btor, the other party to the Reverse Repo. infS"argument is
frivolous. [-12].!!.l.s ["'gOO] ~ndisput~~t!l_a!!b~.BJ.n.d.~we[e transferred to Ma,xPharma at th~.,d_i[e~_oru~f Q~~~or. In directing payment of the sale proceeds f()""MaxPharmai-Qebtor e~~rt~d dominion ()Y~f th~.f!Jnqs ~nd used th~m fqr,~.s. o~ pu.r~,q!;~,s. Thus, from the viewpoint of Defendant, payment to MaxPharma constituted payment to Defendant, and fulfilled De/en'dant's obligation under the first leg of ttie Reverse Repo. n3 - - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n3 Trustee's separate statement of undisputed facts asserts that Debtor's instructions to Defendant to transfer the proceeds to MaxPharma were not property authorized by Debtors board and were therefore ultra vires. The facts asserted by Trustee
dearly establish that the instructions were made with at least apparent authority, and that Debtor implicitly ratified the transaction after the fact. Moreover, Trustee raise no ultra vires argument in the memoranda filed in support of his motion for summaI)' judgment or in opposition to Defendant's motion for summary judgment. ~
- - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
c. Must Defendant Satisfy Section 546(f}? Trustee [-13] argues that section 546(f) governs Repo transactions and that Defendant is not entitled to protection under that statute. Section 546(f) provides: HN12+notwithstanding sections 544, 545, 547, 548(a)(2), and 54B(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 741 (5) or 761 (15) of this title, or settlement payment, as defined in section 741 (8) of this title, made by or to a repo participant, in connection with a repurchase agreement and that is made before the commencement of the case, except under section 548(a)(1) of this title.
11 U.S.C. § 546(f). Section 101 (46) defines "repo participant" as follows:
HN1~"repo participant" means an entity that, on any day during the period beginning 90 days before the date of the filing of the petition, has an outstanding repurchase agreement with the debtor;
11 U.S.C. § 101(46). Trustee argues that section 546(f) governs, because it is the more specific statute, expressly addressing Repo transactions. Trustee argues that Defendant is not protected under section 546(f) , because any Reverse Repo transaction between [-14] Defendant and Debtor closed more than 90 days prepetition, and Defendant is therefore not a "repo participant" under section 101 (46).
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Both the statutory language and legislative history indicate that section 546(f) was intended to address Repo transactions not already covered by section 546(e) rather than to narrow the application of 546(e). Section 546(e) protects only a "commodity broker, forward contract merchant, stockbroker, financial institution. or seculities clearing agency." Section 546(f) protects additional participants in certain Repo transactions. The legislative history to section 546(1) states in relevant part: the proposed amendments are intended to afford participants in the repo market the same treatment with respect to the stay and avoidance provisions of the Code that Public Law 97-222 explicitly provided stockbrokers, securities dearing agencies, commodity brokers and forward contract merchants in connection with securities contracts, commodity contracts and forward contracts.
S. Rep. No. 65, 98th Cong., 1st Sess. 45, 49 (1983). The same legislalive history states dearly that section 546(e) continues to protect stockbrokers engaged in Repo transactions. [**15]
These amendments are not intended, however, to affect the status of repos Involving securities or involving commodities as securities contracts, commodity contracts, or forward contracts, and their consequent eligibility for similar treatment under other provisions of the Code, such as the provisions giving protection to stockbrokers, securities clearing agencies, commodity brokers, and forward contract merchants for liquidation and setoff in respect of securities contracts, commodity contracts or forward contracts.
Id. See also Comark II. 145 Bankr. at 52-53. In summary, section 546(f) HN1~twas intended to supplement rather than narrow section 546(e), and a defendant that qualifies under 546(e) as a stockbroker need not qualify under section 546(f) as a repo participant.
[*901] O. Is there an LBO Exception to Section 546(e)1 Trustee argues that 546(e) should not be interpreted to protect a stockbroker involved in a securities transaction that implements an LBO, relying on Lippi v. City Bank, 955 F.2d 599 (9th Cir. 1992), Kendall v. Sorani. 151 Bankr. 1012 (Bankr. N.D. Cal. 1993), and Wieboldt Stores Inc. v. Schottenstein, 131 Bankr. 655 (N.D. Ill. 1991). [-16] Trustee contends that this LBO exception to section 546(e) applies with special force in the present case, because Defendant knew Debtor was rendered insolvenl by the transaction. Trustee's argument is not supported by the authorities cited. Trustee's reliance on Wieboldt is misplaced. That case held that section 546(e) did not preclUde a fraudulent conveyance action against shareholders whose shares were purchased in an LBO. In the present action, Trustee seeks recovery not from former shareholders, but from a stockbroker that transferred certain securities as a part of the LBO. The Wieboldt court carefully noted that its holding did not leave the stockbroker handling the LBO open to suit. The court acknowledged that the purpose of section 546(e) was to protect brokerage finns, and then stated:
in the instant case, however, requiring the [shareholders] to return to the Trustee payments they received ... poses no significant threat to those in the clearance and settlement chain.
Wieboldt. 131 Bankr. at 664 (footnote omitted). The court also quoted with approval the following excerpt from the law review article it had preViously cited [-17] in holding that section 546(e) does not protect selling shareholders,
"Neither the system of guarantees nor the solvency of participants in the chain is threatened by a legal order in which payments to the shareholders by their brokers are subject to recovery by a trustee in bankruptcy. Thus, while the flows of funds to and between financial intermediaries in the clearance and settlement chain must be protected in order to insure the stability of those systems. funds flowing from the intermediaries to the shareholders do not require protection, and section 546(e) should therefore not apply."
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[d. at 664 n.11 (quoting Neil M. Garfinkel, Note, No Way Out: Section 546(e) Is No Escape for the Public Shareholder of a Failed LBO, 1991 Colum. Bus. L. Rev. 51. 61-63). The Tenth Circuit has held that there is no LBO exception to section 546(e). That court has applied section 546(e) to bar recovery both from the brokerage handling the transfer of shares in an LBO, see Kaiser I, and from the selling shareholders, see Kaiser II. The court noted that the plain language of section 546(e) covers LBOs as well as more conventional securities transactions {-181 and reasoned flit would be an act of judicial legislation to establish such a limitation." Kaiser to 913 F.2d
at 850. In short, only Wieboldt supports any LBO exception to section 546(e), but even that case does not permit an action against the stockbroker handling the securities transactions involved in the LBO. Trustee's reliance on Lippi and Kendall is equally misplaced. In each of those cases, the plaintiff sought recovery from the bank that financed the LBO. In neither case did section 546(e) even arguably apply, and neither opinion mentions that statute. Finally, assuming arguendo that Defendant knew the Reverse Repo was part of an LBO and that the LBO rendered Debtor insolvent, such knowledge does not bar application of section 546(e). Section 546(e) HNlstcontains a limned exception for cases involving actual fraud. The statute does not bar actions brought under section 548(a)(1) of the Bankruptcy Code, which allows a trustee to recover a transfer made within one year before the petition date with actual intent to hinder, delay, or defraud creditors. Section 546(e) does bar actions brought under section 544 (using state fraudulent conveyance [-19] statutes) to recover transfers made more than one year prepetition with actual intent to hinder, delay, or defraUd creditors. Thus, it is clear Congress intended to prohibit recovery of "settlement payments" received by stockbrokers- mare than one year prepetition, irrespective of the stockbroker's mental state. Because the transfers at issue here [-902) occurred more than one year prepetition and Trustee's action is brought under section 544, Defendant's knOWledge about the LBO and its effect on Debtor is irrelevant.
lit
Aiding And Abetting Trustee asserts that even if his action to avoid the transfers to Defendant are barred by section 546(e), he may recover damages from Defendant under state law on the theory that Defendant aided and abetted the fraudulent LBO. Trustee argues that liability for damages for aiding and abetting a fraudulent transfer is not barred by section 546(e). Defendant argues that Trustee's aiding and abetting theory fails because: (i) Trustee failed to plead it as a separate claim for relief; (ii) no such cause of action exists under California law; (iii) Trustee lacks standing to assert such a cause of action; and Ov) any such cause of action is barred by [**20] section 546(e). I determine that the Trustee lacks standing to assert the aiding and abetting daim.
a debtor to hinder, delay, or defraud creditors. See Taylorv. S & M Lamp Co., 190 Cal. Apo. 2d 700,706.12 Cal. Rptr. 323 (1961);
HNl GtCalifomia courts permit a creditor to recover civil damages from those who conspire to transfer property of
Hickson v. Thielman, 147 Cal. APD' 2d 11,15,304 P.2d 122 (1956). HN1JtAdebtor's bank~_to.:mJ~e,b.owever, is not authorized to pursue every action that creditors of the debtor might pursue. Cf. In re Ozark Restaurant Eguipmenr-C-o~:-liic.. 816 F.2d 1222~12i6~31r'{8th Cli-:),>cert.aeniea~-484U.S: 84B"n987):A1rustee's only authority to assert creditors state-law causes of action related to fraudulent conveyances is found in section 544(b) of the Bankruptcy Code. n4 That section only permits the trustee to avoid a fraudulent transfer. HN1BtThe trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable I~11 law by a creditor holding an unsecured claim that is allowable under 502 of this title or that is not allowable only under section 502(e) oflhis title.
11 U.S.C. § 544(b) (emphasis added). The Ninth Circuit has squarely held that HlVl9fa trustee's power to avoid fraudulent transfers does not enable a trustee to recover damages for aiding and abetting a fraudulent transfer. - - - - - - - - - - - - - - Footn otes - - - - - - - - - - - - - - -
n4 Section 548 of the Bankruptcy Code creates a federal cause of action for recovery of a fraudulent conveyance. Trustee cannot use section 548, however, because that statute only permits avoidance of transfers made within one year of the petition date. It is undisputed that all transfers to Defendant occurred more than one year before the bankruptcy petition was filed.
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The Act carefully speaks of conveyances of property as being "null and void," and authorizes suit by the trustee to "reclaim and recover such property or collect its value." The actions legislated against are not "prohibited"; those persons [~2] whose actions are rendered "null and void" are not made "liable"; and terms such as "damages" are not used. The legislative theory is cancellation, not the creation of liability for the consequences of a wrongful act.
Elliott v. Glushon. 390 F.2d 514, 516 (9th Cir. 1967) (footnote omitted). In short. Trustee's only authority to bring slate-law claims of creditor's is section 544(b) , and section 544(b) does not authorize Trustee to assert a claim for aiding and abetting a fraudulent transfer. CONCLUSION Bankruptcy Code section 546(e)-bars Trustee's fraudulent transfer action against Defendant Trustee lacks standing to sue Defendant for aiding and abetting a fraudulent conveyance. Accordingly, I grant summary judgment in favor of Defendant. Date: 1-18-95 Thomas E. Carlson United States Bankruptcy Judge Copyright © 2006 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. Your use of this servIce is governed by Temls & Conditions. Please review them.
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re Hamilton Taft &. Co., 176 B.R. 895, 32 Collier Bankr.Cas.2d 1727, 26 Bankr.Ct.Dec. 665 (Bankr.N.D.Cal. Jan 19, 1995) (NO. 91-3-1077-TC, 93-3-121-TC) Affirmed by H In re Hamilton Taft & Co., 196 B.R. 532 (N.D.Cal. Oct 12, 1995) (NO. C 95-1612-51) Judgment Affirmed by PIn re Hamilton Taft & Co., 114 F.3d 991, 30 Bankr.Ct.Dec. 1236, Bankr. L. Rep. P 77,405, 97 Cal. Daily Op. Servo 4410, 97 Daily Journal D.A.R. 7369 (9th Cir.(Cal.) Jun 11, 1997) (NO. 95-17058)
Court Documents Appellate Court Documents (U.S.A.) C.A.9 Appellate Briefs IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant, v. HOWARD, Howard Weil, Labouisse, Friedrichs Incorporated, a Louisiana corporation; Howard Weil Financial Corporation, a Louisiana corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489911 (Appellate Brief) (C.A.9 Feb. 20, 1996) Opening Brief of Appellant Frederick s. Wyle, Trustee of Hamilton Taft &. Company (NO. 95-17058) IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant v. HOWARD, Weil, Labouisse, Friedrichs Incorporated, a Louisiana corporation, Howard Weil Financial Corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489913 (Appellate Brief) (C.A.9 Mar. 21, 1996) Original Brief of Defendant-Appellee Howard, Weil, Labouisse, Friendrichs, Inc. (NO. 95-17058) IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant, v. Howard, Howard WElL, Labouisse, Friedrichs Incorporated, a Louisiana corporation; Howard Weil Financial Corporation, a Louisiana corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489912 (Appellate Brief) (C.A.9 Apr. OS, 1996) Reply Brief of Appellant Frederick s. Wyle, Trustee of Hamilton Taft &. Company (NO. 95-17058) Negative Only
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KeVCite - 176 B.R. 895 -;I.J Citing References (Showing 41 documents)
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Positive Cases (U.S.A.)
.1.* * *:
Discussed In re Hamilton Taft & Co., 114 F.3d 991, 992+, 30 Bankr.Ct.Dec. 1236, 1236+, Bankr. L. Rep. P 77,405, 77405+, 97 Cal. Daily Op. Servo 4410,4410+,97 Daily Journal DAR. 7369, 7369+ (9th Cir.(Cal.) Jun 11, 1997) (NO. 95-17058) " HN: 1,2,4 (B.R.)
**
Cited P 2. In re Gandy, 299 F.3d 489, 496, 48 Collier Bankr.Cas.2d 895, 895, Bankr. L. Rep. P 78,709, 78709 (5th Cir.(Tex.) Jul 22, 2002) (NO. 02-50185)
3. In re Mark Industries, Inc., 110 F.3d 69, 69 (9th Cir.(Cal.) Mar 20, 1997) (Table, text in WESTLAW,-NO. 95-55712) P4. Forum Ins. CO. V. Devere Ltd., 151 F.Supp.2d 1145, 1149 (C.D.Cal. Jan 02, 2001) (NO. CV 97-9386 NM RCX) HN: 8 (B.R.) P 5. In re Hechinger Investment Co. of Delaware, 274 B.R. 71, 98 (D.Del. Feb 20, 2002) (NO. 99-2283, CIV.A.OO-840-RRM) " HN: 5 (B.R.) H 6. In re National Forge Co., 344 B.R. 340, 371 (W.D.Pa. ]un 09, 2006) (NO. CIV.A. 04-21 ERIE) " HN: 1 (B.R.)
c 7. In re Lucas Dallas, Inc., 185 B.R. 801, B05, 34 Collier Bankr.Cas.2d 1095, 1095, 27 Bankr.Ct.Dec. 955, 955, 95 Daily Journal DAR. 12,382, 12382 (9th Cir.BAP (Cal.) Aug 17, 1995) (NO. NC-94-2055-HVR, 93-4562 AN, NC-94-2116-HVR, 91-46079 IN) " HN: 8 (B.R.) 8. ]n re Sia, 2006 WL 2472995, *12 (Bankr.D.Hawai'j Aug 25, 2006) (NO. 98-04912, ADV. 00-00102)
Secondary Sources (U.S.A.) H 9. Right of creditor to recover damages for conspiracy to defraud him of claim, 11 A.L.RAth 345, §10+ (1982) HN: 4 (B.R.)
10. s 6:12. Fraudulent conveyance attacks -- Cases, SECACQMERG 5 6:12, s 6:12+ (2006) HN: 1,5 (B.R.) 11. Bankruptcy Service Lawyers Edition s 31:254, s 31:254. Leveraged buyouts (2006) HN: 6 (B.R.) 12. Bankruptcy Service Lawyers Edition s 32:208, 13. Bankruptcy Service Lawyers Edition
5
5
32:208. Generally (2006) HN: 1,4,5 (B.R.)
32:210, s 32:210. Congressional intent (2006) HN: 1,5 (B.R.)
14, Bankruptcy Service Lawyers Edition s 32:213, s 32:213. What constitutes "settlement payment" -Particular determinations -- Reverse repo's (2006) HN: 1,5 (B.R.)
c
15. CJS Conspiracy
5
49, s 49. Defrauding creditors (2006) HN: 7 (B.R.)
c 16. DERIVATIVES AND REHYPOTHECATION FAILURE: IT'S 3 :00 P.M., DO YOU KNOW WHERE YOUR COLLATERAL IS?, 39 Ariz. L. Rev. 949, 1001 (1997)
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c 17. LEVERAGED BUYOUTS AND FRAUDULENT CONVEYANCES: YET ANOTHER Ln.JDATE, 7 J. Bankr. L. & Prac. 315, 333 (1998) HN: 6 (B.R.) c: 18. FORWARD CONTRACTS, BANKRUPTCY SAFE HARBORS AND THE ELECTRICITY INDUSTRY, 51 Wayne L. Rev. 49, 106 (2005) HN: 3 (B.R.) 19. ACQUISITION FINANCING, 754 PU/Comm 385, 449 (1997) HN: 1,5 (B.R.) 20. ACQUISITION FINANCING, 739 PLI/Comm 367, 427 (1996) HN: 1,5 (B.R.) 21. SPECIAL BANKRUPTCY CODE PROTECTIONS FOR DERIVATIVE AND OTHER CAPITAL MARKET TRANSACTIONS, 721 PU/Comm 95, 114 (1995) HN: 1,5,6 (B.R.)
22. SECURITIES, FORWARD AND COMMODITY CONTRACTS AND REPURCHASE AND SWAP AGREEMENTS UNDER U.S. INSOLVENCY LAWS, 721 PLl/Comm 401, 410+ (1995) HN: 1,2,4 (B.R.)
Court Documents Appellate Court Documents (U.S.A.) Appellate Petitions, Motions and Filings . 2.3. Wyatt R. HASKELL, Petitioner, v. PWSHOLDING CORPORATION, Bruno's Inc., Foodmax of Mississippi, Inc., A.F. Stores Inc., Br Air, Inc., Foodmax of Georgia, Inc., Foodmax of Tennessee, Inc., Foodmax Inc., Lakeshore Foods, Inc., Bruno's Food Stores, Inc., Georgia Sales Company, SSS Enterprise, Inc., Respondents., 2003 WL 21698608, *21698608+ (Appellate Petition, Motion and Filing) (U.S. Jan 29, 2003) Petition for Writ of Certiorari (NO. 02-1134) *: HN: 6 (B.R.)
*
Appellate Briefs 24. In re: PWS HOLDING CORPORATION, BRUNO'S, INC., Food Max of Mississippi, Inc., A.F. Stores, Inc., Br Air, Inc., Food Max of Georgia, Inc., Food Max of Tennessee, Inc., Food Max, Inc., Lakeshore Foods, Inc., Bruno's Food Stores, Inc., Georgia Sales Company, and SSS Enterprise, Inc., Debtors, Wyatt R. HASKELL, Appellant., 2001 WL 34095042, *34095042+ (Appellate Brief) (3rd Cir. Aug 28, 2001) Brief of Appellant (NO. 01-1462) HN: 6 (B.R.)
**
25. In The Matter Of: Joe Alvin ANDREWS, Sr., Debtor. CADLE COMPANY, Appellant, v. WHATABURGER OF ALICE, INC.; M. Louise Andrews; Kathy A. Reese; George P. Braun; Herbert E. Pounds, Jr.; Joe Alvin Andrews, Jr.; Michael Boudloche; Joe Alvin Andrews, Sr., Appellees., 2001 WL 34353904, *34353904+ (Appellate Brief) (5th Cir. Nov 07, 2001) Appellant's Brief (NO. 01-40807) • • HN: 3 (B.R.) 26. THE CADLE COMPANY, Plaintiff-Appellant, v. WHATABURGER OF ALICE, INC.; M. Louise Andrews; Kathy A. Reese; Herbert E. Pounds, Jr.; George P. BraLIn; and Joe Alvin Andrews, Jr., Defendants-Appellees., 1998 WL 34114582, *34114582+ (Appellate Brief) (5th Cir. Jul 09, 1998) Brief of Appellant (NO. 98-50368) *: HN: 6 (B.R.)
*
27. FORUM INSURANCE COMPANY, Plaintiff/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; Otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL 32120536, *32120536+ (Appellate Brief) (9th Cir. Aug 20, 2002) Reply Brief of Appellant Forum Insurance Company (NO. 02-55053) y
*-;:
2B. FORUM INSURANCE COMPANY, Petitioner/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; Otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL 32120535, *32120535+ (Appellate Brief) (9th Cir. Jul 20, 2002) Brief of Appellee Jerome Eglin (NO. 02-55053)
"* * *:
29. FORUfv1 INSURANCE COMPANY, Plaintiff/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL
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32120534, *32120534+ (Appellate Brief) (9th Cir. Jun 11, 2002) Brief of Appellant Forum Insurance Company (NO. 02-55053)
***
30. Robert B. BURNS, Plaintiff-Appellant, v. James BALDWIN, et aI., Defendants-Appellees., 2002 WL 32116680, *32116680+ (Appellate Brief) (9th Cir. May 30, 2002) Appellant's Opening Brief (NO. 02-55116) ,., • • HN: 6,7 (B.R.) 31. In re THRIFTY OIL CO., a California Corporation; Golden West Refining Company, a California Corporation; Cluj Distribution Company, a California, Corporation; Benzin Supply Company, a California Corporation; and Golden West Distribution Company, a California Corporation, Debtors, THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIONAL TRUST & Savings Association, Appellee., 2000 WL 33981185, *33981185+ (Appellate Brief) (9th Cir. Dec 18, 2000) Appellant's Reply Brief (NO. 00-56159) HN: 2,4 (B.R.)
*" *
32. In re: THRIFTY OIL CO., a California corporation; Golden West Refining Company, a California corporation; ClUj Distribution Company, a California corporation; Benzin Supply Company, a corporation; and Golden West Distribution Company, a California corporation, Debtors. THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIOI\lAL TRUST & SAVINGS ASSOCIATIOI\l, Appellee" 2000 WL 33978038, *33978038+ (Appellate Brief) (9th Cir. Nov 15, 2000) Appellee's Brief (NO. 00-56159) " HN: 2,4,5 (B.R.)
* **
33. In re: THRIFTY OIL CO., a California corporation; Golden West Refining Company, a California corporation; CLUJ Distribution Company, a California corporation; Benzin Supply Company, a corporation; and Golden West Distribution Company, a California corporation, Debtors. THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, Appellee., 2000 WL 34017800, *34017800+ (Appellate Brief) (9th Cir. Nov 14, 2000) Appellee's Brief (NO. 00-56159) " HN: 1,2,5 (B.R.)
* * "* *
34. IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, PlaintIff-Appellant v. HOWARD, Well, Labouisse, Friedrichs Incorporated, a Louisiana corporation, Howard Weil Financial Corporation; and Legg Mason, Inc" a Maryland corporation, Defendants-Appellees., 1996 WL 33489913, *33489913+ (Appellate Brief) (9th Cir. Mar 21, 1996) Original Brief of Defendant-Appellee Howard, ... (NO. 95-17058) HN: 4 (B.R.)
,,* * *
Trial Court Documents (U.S.A.) Trial Motions, Memoranda and Affidavits 35. Diane MANN, as Trustee for the Estate of LeapSource, Inc.; Christine V. Kirk; Thomas F. Gilman; Indu Gupta; Kimberly C. Hartmann; Julie B. McCollum; Kelly A. Powers; Bobby D. Scott; and Patricie E. Walker, Plaintiffs, v. GTCR GOLDER RAUNER, L.L.c.; a Delaware limited liability company; GTCR Fund VI, L.P., a Delaware limited partnership; GTCR VI Executive Fund, L.P, a Delaware limited partnership; GTCR Associates VI, a Delaware general partnership; Michael Makings;, 2006 WL 1183016, *1183016 (Trial Motion, Memorandum and Affidavit) (D.Ariz. Mar 10, 2006) Motion for Summary Judgment on (1) Contract ••• (NO. CIV-02-2099-PHX-RCB)
*
36. Robert B. BURNS, Plaintiff, v. James P. BALDWIN, et ai" Defendants., 2000 WL 34631826, *34631826+ (Trial Motion, Memorandum and Affidavit) (CD.Cal. Sep 11, 2000) Plaintiff's Memorandum of Points and Authorities .•. (NO. SACVOO-0249AHS, ANX) *:
*
37. IN RE: 3DFX INTERACTIVE, INC., a California corporation, Debtor, Ein: 77-0390421 Carlyle Fortran Trust, a Maryland real estate investment trust, Plaintiff, v. NVIDIA CORPORATION, a Delaware corporation; Nvidia Us Investment Company, f/k/a Titan Acquisition Corp. No.2, a Delaware corporation; 3dfx Interactive, Inc., a California corporation, Jen-Hsun Huang, an individual; James C Gaither, an indiVidual; A. Brooke Seawell, an individual; William J. Miller" 2005 WL 2868911, *2868911+ (Trial Motion, Memorandum and Affidavit) (N.D.Cal. Oct 17, 2005) Opposition of Carlyle Fortran Trust to 3dfx ••. (NO. 05-00427JW) • • 38. In re: P.R.T.C., INC, Braunstein International Corporation, Debtors, Gregory A. Akers, Trustee, and Harold S. Taxel, Trustee, Plaintiffs, v. David Troy Braunstein, Christina Braunstein, Braunstein De Mexico,
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KeyCile Result
S.A. De C.V., BIC Technologies, Inc., Solution Technology Group, LLC, Solution Technology De Mexico, Almacen De Computadoras, Rosenbaum & Diehl, a Professional Corporation, Keith A. Rosenbaum, Duckor, Spradling, & Metzger, a Professional Corporation, and, 2002 WL 32955064, *32955064 (Trial Motion, Memorandum and Affidavit) (S.D.Cal. Jan 02, 2002) Memorandum of Points and Authorit:ies in Support a •• (1\10. OOCV2307-H, JFS) *:
"*
39. In Re: ENRON CORP., et aI., Debtors. Enron Corp., Plaintiff, v. J.P. Morgan Securities, Inc., et al., Defendants. Enron Corp., Plaintiff, v. Mass Mutual Life Insurance Co., et aI., Defendants., 2005 WL 3038836, *3038836+ (Trial Motion, Memorandum and Affidavit) (S.D.N.Y. Aug 01, 2005) Memorandum of Law in Support of Lehman's Motion ••• (NO. 01-16034, AJG) HN: 1,3 (B.R.)
**
40. GREAT AMERICAN UFE INSURANCE COMPANY, Plaintiff, v. Katharine Shaw Wallace THOMPSON, Defendant., 2006 WL 1442021, *1442021 (Trial Motion, Memorandum and Affidavit) (S.D.Ohio Apr 25, 2006) Reply in Support of Plaintiff1s Emergency Motion ••• (NO. 104CV815)
**
41. In re: John SASSER, Debtor; In re Mayflower Transit, LLC, Plaintiff, v. John Sasser, Defendant., 2002 WL 32931587, *32931587 (Trial Motion, Memorandum and Affidavit) (Bankr.E.D.Cal. Jun 03, 2002) Reply to Opposition of Chapter 7 Trustee1s ••• (NO. 02-10300A-11)
**
Full History
re)
I Negative
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2006 West I Accessibility Information
THOIVISON
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William J. Perlstein (WP 1073) Craig Goldblatt (CO 6793) Jonathan E. Paikin (JP 7599) Caroline Rogus (CR 6931)
WIL1v£ER CUTI..ER PICKERING LLP 2445 M Stree~ N.W. Washington, DC 20037 Telephone: (202) 663-6000 Facsimile: (202) 663-6363 Attorneys for Amici Curiae International Swaps and Derivatives Association, Inc., Securities Industry Association, and The Bond Market Association
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK .~-----------------------------------------------------------x
In re
Chapter 11 Case No. 01-16034 (AJG)
ENRON CORP., et al., Jointly Administered
Debtors.
------------------------------------------------------------- x Adv. No. 03-93383 (AjG)
ENRON CORP., Plaintiff,
v. LEHMAN BROTHERS FINANCE SA., et at, Defendants.
------------------------------------------------._--_.------- x MEMORANDUM OF LAW OF INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIAnON, INC., SECURITIES INDUSTRY ASSOCIATION, AND TIlE BOND MARKET ASSOCIATION AS AMICUS CURIAE IN SUPPORT OF DISMISSAL OF ADVERSARY PROCEEDING
TABLE OF CONTENTS Page
ii
TABLE OF AUTHORITffiS PRELIl\1IN'ARY STATEMENT
_
1
STATEMENT OF INTEREST
3
STATUTORY, FACTUAL AND PROCEDURAL BACKGROUND
5
I.
SECTION 546(e) PROTECTS PAYMENTS MADE UNDER OTC EQUITY DERIVATIVES CONTRACTS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
A.
B. II.
m.
13
The Transfers Are Protected "Settlement Payments" In The Forward Contracts Trade
14
The Transfers Are Protected "Settlement Payments" In The Securities Trade
16
SECTION 546(g) PROTECTS PAYMENTS MADE IN CONNECTION WITH OTC DERIVATIVES TRANSACTIONS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
18
5TATE LAW CLAIMS THAT CIRCUMVENT THE PROTECTIONS AFFORDED TO THE FINANCIAL MARKETS BY TIlE FEDERAL BANKRUPTCY LA W5 ARE PREEMPTED
23
CONCLUSION
27
TABLE OF AUTHORITIES
CASES Page(s) Bessette v. Avco Financial Services. Inc., 230 F.3d 439 (lst Cir. 2000)
25
Bevill. Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Crr. 1989)
7,8,9, 17
Century Glove. Inc. v. Iselin (In re Century Glove), 151 B.R. 327 (Bankr. D. Del. 1993)
25
Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992)
25
Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th CiT. 2001)
25
Curtin v. Port Authority, 183 F. SUpPa 2d 664 (S.D.N.Y. 2002)
24
Diamante v. Solomon & Solomon, P.C., No. I:99CVI339 (FJSIDRH), 2001 WL 1217226 (N.D.N.Y. Sept. 18, 2001)
26
In re Comark, 971 F.2d 322 (9th Crr. 1992)
17
In re Hamilton Taft & Co., 176 B.R. 895 (Bankr. N.D. Cal.), aff'd, 196 B.R. 532 (N.D. Cal. 1995), affd, 114 F.3d 991 (9th Cir. 1997) In re Hechinger Investment Co. of Delaware, 274 B.R. 71
CD. Del. 2002)
In re Interbulk, Ltd., 240 B.R. 195 (Banlcr. S.D.N.Y. 1999)
17, 18 16, 17, 24-25, 26 9,20
In re Nation, 236 B.R. 150 (S.D.N.Y. 1999)
24
In re Olympic Natural Gas Co., 294 F.3d 737 (5th CiT. 2002)
14
In re Resorts International, Inc., 181 F.3d 505 (3d Cir. 1999)
17
International Shoe Co. v. Pinkus, 278 U.S. 261 (1929)
24
Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846 (lOth Cir. 1990)
7, 17, 18
Kaiser Steel Corp. v. Pearl Brewing Co., 952 F.2d 1230 (lOth Crr. 1991)
17
MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996)
25
Penn Terra Ltd. v. Department of Environmental Resources, 733 F.2d 267 (3d Cir. 1984)
25
Pereira v. First North American National Bank, 223 B.R. 28 (N.D. Ga. 1998)
25
ii
PertusD v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000)
Thrifty Oil Co. v. Bank of America National Trust & Savings Ass'n, 322 F.3d 1039 (9th Crr. 2003)
25-26
9, 10
SEC NO~ACTION LETTERS Chicago Rd. Options Exchange, SEC No-Action Letter, Fed. Sec. L. Rep.' 79,665 (Feb. 22, 1991)
20, 21
Goldman. Sachs & Co., SEC No-Action Letter, 2003 WL 22358822 (Oct. 9, 2003)
20
Goldman, Sachs & Co., SEC No-Action Letter, 1999 wr,-I2440I8 (Dec. 20, 1999)
20
STATUTES 7 U.S.C. § Ia(4)
15
11 U.S.C. § 101(25)
14, 15, 16
11 U.S.C. § IOl(5IA)
14
11 U.S.C. § 10I(53B)
passim
11 U.S.C. § 546(e)
passim
II U.S.C. § 546(g)
passim
11 U.S.C. § 547
5
11 U.S.C. § 548
5
11 U.S.C. § 548(a)(1)(A)
13
11 U.S.C. § 550
5
11 U.S.C. § 741(8) 11 U.S.C. § 761(8)
17 _
15
15 U.S.C. § 78 et seq
6, 22
III
1982 Amendments to Bankruptcy Code, Pub. L. No. 97-222, 96 Stat. 235 1984 Amendments to Bankruptcy
Code~
7, l3
Pub. L. No. 98-353, 98 Stat. 2706
9
1990 Bankruptcy: Swap Agreements and Forward Contracts, Pub. L. No. 101311,104 Stat. 267
11
Commodity Futures Modernization Act of2ooo, Pub. L. No. 106-554,114 Stat. 2763
21-22
LEGISLATIVE MATERIALS H.R. Rep. No. 97-420 (1982), available a11982 WL 25042
H.R. Rep. No. 101-484 (1990), available at 1990 WL 92539
7, 13,16 passim
S. Rep. No. 98-65 (1983)
8, 9
S. Rep. No. 101-285 (1990), available at 1990 WL 259288
passim
Bankruptcy Treatment ofSwap Agreements and Forward Contracts: Hearing on H.R. 2057 and B.R. 1754 Before the Subcommittee on Economic and Commercial Law of the House Committee on the Judiciary, 101st Congo 1 (1990)
6
Financial Contract Netting Improvement Act of 2001, H.R. 11, 107tll Congo (2001) Interest Swap: Hearing on S. 396 Before the Subcommittee on Courts and Administrative Practices ofthe Senate Convnittee on the Judiciary, 10 1st Congo 1 (1989)
22
lO~
11, 19
136 Congo Rec. S7535 (1990)
6, 12
136 Congo Rec. S7536 (1990)
11, 18
:MISCELLANEOUS 2000 Enron Corp. 10-K. available at http://www.sec.gov/Archives/edgar/data/I02440l/000102440101500010/ OOOl024401-01-500010.txt
12
Collier on Bankruptcy t]i 560.02 (15th ed. 2003)
20
iv
William J. Perlstein (WP 1073) Craig Goldblatt (CG 6793) Jonathan E. Paikin (JP 7599) Caroline Rogus (CR 6931) WILMER CUTLER PICKERING HALE AND DORR LLP 2445 M Street, N.W. Washington, DC 20037 Telephone: (202) 663-6000 Facsimile: (202) 663-6363
Attorneys for Amici Curiae International Swaps and Derivatives Association, Inc., Securities Industry Association, and The Bond Market Association UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ~---~---------------------------------~---~----------------~~x
Chapter 11 Case No. 01..16034 (AJG)
In re ENRON CORP., et ala,
Jointly Administered Debtors. ~------~---------------------------------------~---~..-------
ENRON CORP.,
x
Plaintiff,
Adv. Pro. No. 03-93373 (AJG)
v. UBSAG
and UBS SECURITIES LLC, flk/a UBS WARBURG LLC (a/k/a UBS WARBURG), Defendants.
------------------------------------------------------------- x MEMORANDUM OF LAW OF INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIAnON, INC., SECURITIES INDUSTRY ASSOCIAnON, AND THE BOND MARKET ASSOCIATION AS AMICI CURIAE IN SUPPORT OF DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
T ABLE OF CONTENTS
Page
ii
TABLE OF AUTHORITIES PRELI1vIIN"ARy STATEMENT
_
STATEMENT OF INTEREST STATUTORY, FACTIJAL AND PROCEDURAL BACKGROUND
I.
1 2
_
5
SECTION 546(e) PROTECTS PAYMENTS MADE UNDER aTC
EQUITY DERIVATIVES CONTRACTS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS The Transfers Are Protected "Settlement Payments" In The Forward Contracts Trade
13
The Transfers Are Protected "Settlement Payments" In The Securities Trade
15
SECTION 546(g) PROTECTS PAYMENTS MADE IN CONNECTION WITH OTe DERIVATIVES TRANSACTIONS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
17
STATE LAW CLAIMS mAT ClRCUMVENT THE PROTECTIONS AFFORDED TO TIIE FINANCIAL MARKETS BY TIlE FEDERAL B.ANKR.UPfCY LAWS ARE PREEMPTED
23
A.
B.
II.
III.
12
CONCLUSION
27
TABLE OF AUTHORITIES CASES Page(s) Bessette v. Avco Financial Sen;icest Inc., 230 F.3d 439 (lst Cir. 2000)
_
Bevill. Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Cir. 1989) Century Glove, Inc. v. Iselin (111 re Century 1993)
Glove)~
25
7,8, 16
151 B.R. 327 (Bania. D. Del. 25
Cipollone v. Liggett Group, Inc., 505 U.S. 504 (l992)
25
Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th Cir. 2001)
25
Curton v. Port Authority. 183 F. Supp. 2d 664 (S.D.N.Y. 2002)
24
Diamante v. Solomon & S%mon t p.e., No. 1:99CV1339 (FJSfDRH)t 2001 WL 1217226 (N.D.N.Y. Sept. 18. 2001)
25
In re Comark. 971 F.2d 322 (9th Cir. 1992)
17
In re Hamilton Taft & Co., 176 B.R. 895 (Bankr. N.D. Cal.), affd, 196 B.R. 532 (N.D. Cal. 1995), aff'd, 114 F.3d 991 (9th Cir. 1997) In re Hechinger Investment Co. of Delaware, 274 B.R. 71 (D. Del. 2002) In re Interbulk, Ltd" 240 B.R. 195 (Bankr. S.D.N.Y. 1999)
15, 18
16-17.24, 25,26 9, 20
In re Nation, 236 B.R. 150 (S.D.N.Y. 1999)
24
In re Olympic Natural Gas Co., 294 F.3d 737 (5th CiT. 2002)
14
In re Resorts International, Inc., 181 F.3d 505 (3d CiT. 1999)
16
International Shoe Co. v. Pinkus, 278 U.S. 261 (1929)
23
Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.ld 846 (lOth CiT. 1990)
6, 16, 17
Kaiser Steel Corp. v. Pearl Brewing Co., 952 F.2d 1230 (lOth Cir. 1991)
16
MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996)
25
Penn Terra lJd. v. Department of Environmental Resources, 733 F.2d 267 (3d Cir. 1984)
24
Pereira v. First North American National Bank, 223 B.R. 28 (N.D. Ga. 1998)
25
11
PertuSD
v. Ford Nlotor Credit Co., 233 F.3d 417 (6th Cir. 2000}
Thrifty Oil Co. v. Bank of America NatiolUll Trust & Savings Ass 'n, 322 F.3d 1039 (9th Cir. 2003)
25
9
SEC NO-ACTION LETTERS Chicago Bd. Options Exchange. SEC No-Action Letter, Fed. Sec. L. Rep. i 79,665 (Feb. 22, 1991)
20
Goldman, Sachs & Co., SEC No-Action Letter, 2003 WL 22358822 (Oct. 9, 2003)
20
Goldman, Sachs & Co., SEC No-Action Letter. 1999 WL 1244018 (Dec. 20, 1999)
20
STATUTES 14
7 U.S.C. § la(4) 11 U.S.C. § 101(25)
14, 15
11 U.S.C. § IGI(5IA)
13
11 U.S.C. § 101{53B)
18, 20,21
11 U.S.C. § 546(e)
passim
il U.S.C. § 546(g)
passim
11 U.S.C. § 547
5
11 U.S.C. § 548
5, 13
11 U.S.C. § 550
5
11 U.S.C. § 741(8)
16
11 U.S.C. § 761(8)
14 6, 21
15 U.S.C. § 78 et seq
1982 Amendments
/0
Bankruptcy Code, Pub. L. No. 97-222,96 Stat. 235
iii
7, 13
• FELDMAN, WALDMAN & KLINE A Professional Corporation 2 ;ATRICIA S. MAR L.J. CHRIS MARTINIAK 3 2700 Russ Building 235 Montgomery street 4 San Francisco, CA 94104 Telephone: (415) 981-1300 5
6
Attorneys for Trustee Frederick S. Wyle
7
a
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA
10
In re
11
HAMILTON TAFT
&
COMPANY,
) )
BANKRUPTCY NO. 91-31077 LK
)
Chapter 11
)
Debtor.
12
13 14
-----------------) FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft' & Company,
15
plaintiff, 16
v. 17
18 19
20
21
22 23 24 25
26
)
CONNIE C. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.; WINTHROP REALTY COMPANY; CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESONER FINANCIAL MANAGEMENT CORPORATION; DRESDNER ENTERPRISES, INC.: DRESDNER ,PETROLEUM, INC.; H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.; KNIGHTSBRIDGE COMPANIES, INC.: and KNIGHTSBRIDGE GUARANTY COMPANY, I Defendants.
) ) )
) ) ) )
) ) ) } ) ) }
) ) ) )
) ) ) )
) ) } )
----------------}
Adversary Proceeding No.
2 ]
5 6
FELDMAN, WALDMAN & KLINE A Professional corporation PATRICIA S. MAR L.J. CHRIS MARTINIAK 2700 Russ Building 235 Montgomery street San Francisco, CA 94104 Telephone: (415) 981-1300 Attorneys for Trustee Frederick s. Wyle
7
UNITED STATES BANKRUPTCY COURT
B
NORTHERN DISTRICT OF CALIfORNIA
9
10
i' 12 1] 1.1
In re
) ) ) ) )
HAMILTON TAFT & COMPANY,
FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft & Company,
Plaintiff,
) )
9~ )
v.
17
25
CONNIE C. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.; WINTHROP REALTY COMPANY; CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESDNER FINANCIAL MANAGEMENT CORPORATION; DRESDNER ENTERPRISES, INC.; DRESDNER PETROLEUM, INC.: H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.; KNIGHTSBRIDGE COMPANIES, INC.; and KNIGHTSBRIDGE GUARANTY COMPANY, Defendants.
26
-----------------)
20 21
22 23 2.1
Adversary Proceeding
N0"Q---
CO~INT 1.
) ) )
16
J9
Chapter 11
Debtor. ---~-------------)
IS
18
BANKRUPTCY NO. 91-31077 LK
)
-
)
2.
)
3.
) )
) )
4. 5. 6.
) )
7.
)
) ) ) )
) )
)
81 tK
FOt) Recovery of Fraudulent Transfer Pursuant to 11 U.S.C. § 548 and California Civil Code § 3439 Constructive Trust Turnover of Property or the Estate Under 11 U.S.C. § 542 Injunction Conversion Breach of Fiduciary Duties Breach of Contract (II
~ J,t.M:J~K ~~
~) t1;,)/u.f/~
Plaintiff Frederick
2
s.
Wyle, Trustee, alleges as
follows:
THE PARTIES
J 4
1.
5
Plaintiff is the duly appointed and acting trustee
in this case. 2.
6
Hamilton Taft & Company, Inc.
("the Debtor")
is a
7
California corporation with its principal place of business in San
8
Francisco, California.
9
3•
Plaintiff is informed and believes and thereon
10
alleges that defendant Connie C. Armstrong, Jr.
11
the chairman and sole shareholder of the Debtor, and is a resident
12
and citizen of the State of Texas. 4.
13
("Armstrong")
is
Plaintiff is informed and believes and thereon
14
alleges that defendant The Remington Companies, Inc.
15
is a Texas corporation with its principal place of business in
16
Dallas, Texas, and is owned or controlled by, and affiliated with,
l7
Armstrong and his affiliated entities.
I
a
5.
("Remington")
Plaintiff is informed and believes and thereon
19
alleges that defendant Winthrop Realty Company ("Winthrop")
20
Texas corporation with its principal place of business in Dallas,
21
Texas, and is owned or controlled by, and affiliated with,
22
Armstrong and his affiliated entities. 6.
2]
25
Plaintiff is informed and believes and thereon
alleges that defendant CCA Holdings, Inc.
2J '!
is a
(nCCA Holdings n
)
is a
Texas corporation with its principal place of business in Dallas,
26
C~PLAINT
-2-
Texas, and is owned or controlled by, and affiliated with, 2
Ar~strong
and his affiliated entities. 7.
]
Plaintiff is informed and believes and thereon
alleges that defendant CCAJ Corporation ("CCAJ")
is a Texas
5
corporation with its principal place of business in Dallas, Texas,
6
and is owned or controlled by, and affiliated with, Armstrong and
7
his affiliated entities. 8.
B 9
Plaintiff is informed and believes and thereon
alleges that defendant Chase Development Corp.
("Chase
is a Texas corporation with its principal place oE
10
Development")
!1
business in Dallas, Texas, and is owned or controlled by, and
r2
affiliated with, Armstrong and his affiliated entities. 9.
13 1.4
15 16
17
alleges that defendant Cal-Pacific Management Corp. Pacific")
20 21
22
25
is a Texas corporation with its principal place of
affiliated with, Armstrong and his affiliated entities. 10.
Plaintiff is informed and believes and thereon
alleges that defendant Chayson Mortgage and Investment Company ("Chaysonn)
is a Texas corporation with its principal place of
business in Dallas, Texas, and is owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 11.
23
24
("Cal-
business in Dallas, Texas, and is owned or controlled by, and
18 19
Plaintiff is informed and believes and thereon
Plaintiff is informed and believes and thereon
alleges that defendant C.R. Acquisitions, Inc.
("C.R.
Acquisitions") is a Texas corporation with its principal place of
26
C[)04PLAINT
-J-
business in Dallas, Texas, and is owned or controlled by, and 2
affiliated with, Armstrong. and his affiliated entities. 12.
J
Plaintiff is informed and believes and thereon
alleges that defendant DEI, Inc. (HDEI") is a Texas corporation 5 6 7
with its principal place of
10
Ir
f2
affiliated entities. 13.
15 16
Texas corporation with its principal place of business in Dallas, Texas, and is owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 14.
\9 20
21
22
23
controlled by, and affiliated with, Armstrong and his affiliated entities. 15.
26
Plaintiff is informed and believes and thereon
alleges that defendants Dresdner Enterprises, Inc., Dresdner Petrole~,
Inc., and Dresdner Financial Management Corporation
(collectively "Dresdner") are Texas corporations with their principal place of business in Dallas, Texas, and are owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 16.
U
25
Plaintiff is informed and believes and thereon
alleges that defendant H.T. International is an entity owned or
17 IB
Plaintif: is informed and believes and thereon
alleges that defendant suisse Texas, Inc. (HSulsse Texas U ) is a
13 1.11
in Dallas, Texas, and is
owned or controlled by, and affiliated with, Armstrong and his
8 9
b~siness
Plaintiff is informed and believes and thereon
alleges that defendants Knightsbridge Companies, Inc. and Knightsbridge Guaranty Company (collectively "Knightsbridge") are
CC»4PlAINT
-4-
Texas corporations with their principal place of business in 2
Dallas, Texas, and are owned or controlled by, and affiliated
3
with, Armstrong and his affiliated entities. 17.
4
Defendants Remington, Winthrop, CCA Holdings, CCAJ,
5
Chase Development, Cal-Pacific, Chayson, C.R. Acquisitions, DEI,
6
Suisse Texas, H.T.
7
sometimes-collectively be referred to as the "Armstrong
8
Companies." JURISDICTION AND VENUE
9
18.
10
This is an adversary proceeding brought pursuant to
Bankruptcy Rule 7001, 11 U.S.C. §§541(a), 542, 544, and 548.
\1
19.
12
This Court has jurisdiction of this adversary
proceeding pursuant to 28 U.S.C. §§151, 157, and 1334.
13
Venue is
proper pursuant to 28 U.S.C. §1409.
1<1
20.
15
This adversary proceeding is a core proceeding
pursuant to 28 U.S.C. §157 and this court may enter a final
16
jUdgment herein.
17
GENERAL ALLEGATIONS
18
21.
19
Plaintiff is informed and believes and thereon
alleges that an involuntary bankruptcy petition was filed against
20
the Debtor on March 20. 1991.
2\
Prior to filing the petition, the
Debtor operated as a tax deposit and payment service.
22
The
plaintiff, the Chapter 11 Trustee in this case, was appointed on
23
24
International, Dresdner and Knightsbridge will
March 26, 1991.
The Debtor, by and through the Trustee, continues
-,
to operate a payroll tax deposit and payment service. 26 CCf4PLAII4T
-5-
22.
Plaintiff is informed and believes and thereor.
2
alleges that Armstrong is an insider of the Debtor.
3
the sole shareholder and chairman of the Debtor from March 19a9,
J
when he purchased the Debtor, until the petition was filed.
5
Armstrong owns or controls all of the Armstrong Companies. 23.
C
A.rmstrong ',,:3=.
On various different dates over the period in which
7
Armstrong controlled the Debtor large sums of money belonging to
B
the Debtor were transferred directly or indirectly to various of
9
the Armstrong Companies, including without limitation Dresdner,
10
Remington, Knightsbridge, and Winthrop.
II
books and records show that (a)
12 IJ 111
15 16
17
\B 19
20
2]
Knightsbridge,
26
(b) Debtor's funds were transferred to an account
at Merrill Lynch which were then transferred to Bank One in Dallas and then transferred to Knightsbridge, and (c) on numerous dates in 1990 funds were transferred from Debtor to the Merrill Lynch account and then "invested" in various of the Armstrong Companies such as Dresdner, Remington, Winthrop, and Knightsbridge. Such trans fers-- from Debtor' directly or indirectly to Armstrong companies will be referred to herein as HAffiliate Transfers H. 24.
All, or virtually all, of the Affiliate Transfers
came from funds being held by ~bl~gations
~btor
for payment of tax
of Debtor's clients.
25. 25
in January and February of 1991
approximately $11,000,000 was transferred from Debtor directly to
21
22
for example, Debtor's
In October 1990, the internally prepared financial
statements of the Debtor show an intercompany receivable of $68,800,000 which evidences that the total Affiliate Transfers
C~PLAINT
-6-
were at least in that amount.
Plaintiff and Plaintiff's
2
accountant have searched the files of Debtor and questioned
]
relevant staff of Debtor, but have found no collateral,
d
agreements, notes, or interest payments relating tG these
5
transfers. 26.
6
~~e
securi~j
In 1990, Debtor's internally prepared financial
7
documents reflect short term indebtedness owed by Knightsbridge to
8
Debtor in an amount of $8,175,021.55 reflecting apparent transfers
9
in approximately that amount from Debtor to Knightsbridge.
10
Plaintiff and Plaintiff's accountant have searched the files of
11
Debtor and questioned the relevant staff of Debtor, but have found
12 13
no notes, agreements,
relating to such transfers. 27.
\ Ii
15 16
19
20 21
made. 28.
2d
25 26
Plaintiff is informed and believes and alleges on
that basis that some of the funds comprising the Affiliate Transfers were further distributed from the initial recipient company to one or more other companies among the Armstrong Companies. 29.
22 23
Plaintiff is informed and believes and alleges on
that basis that Armstrong caused the Affiliate Transfers to be
17 18
interest payments, collateral or security
Plaintiff is informed and believes and alleges on
that basis that large sums of money ostensibly advanced by one or more of the Armstrong companies were used (a)
to purchase, rent or
lease real property, goods or services for the personal use and/or enjoyment of Armstrong,
C~PLAINT
(b) to make investments or acquisitions
-7-
for the benefit of Armstrong,
(c) to make 1 arge gi fts, dona t ie,.s .
2
or contributions at the direction and for the benefit of
]
Annstrong,
a
or criminal liability of Armstrong, or (e)
5
the direct of indirect benefit of Armstrong.
6
(d)
30.
for a fund to protect against litigation or ci·.;il for other purposes fer
Plaintiff is informed and believes and alleges on
7
that basis that the Armstrong Companies that advanced large sums
8
of money referred to in SUbparagraph E immediately above (a) were
9
not sufficiently profitable to generate such sums on their own
10
operations, and (b) were the recipients of large sums of money
11
directly or indirectly from Debtor as part of the Affiliate
12
Trans fers .
}3 \4
31.
Plaintiff has been informed of and believes the
following and on that basis alleges: a)
IS
Some or all of the Armstrong Companies that
16
received Affiliate Transfers were not profitable and that some of
17
the funds received from Debtor were used to pay operating expenses
18
of the recipient Affiliate Company. b)
19
Upon obtaining control of the Debtor,
20
Armstrong wired approximately $2 million from the Debtor to the
11
holding company for some of the Armstrong Companies.
12
funds, Armstrong retired a $600,000 note which the prior owners of
23
the Debtor had executed to Mr. Stanley Rosenberg and that
211
Armstrong had agreed to pay as the "price" for buying the Debtor.
25 26
c)
out of these
In July, 1989, Armstrong transferred
approximately $3 million of funds belonging to the Debtor to
C~PLAH/f
-8-
Dresdner Enterprises, 2
Inc., a company which formerly owned the
Debtor and is currently owned by Armstrong. d)
J
In August, 1989, Armstrong transferred $7
million of the Debtor's money to an account of Dresdner 5
Enterprises,
Inc.
in order to purchase a shopping center that
6
Armstrong or one of the Armstrong Companies was buying.
7
e)
In February, 1990 Armstrong transferred
B
approximately $10
9
purchase of a showpiece ranch of about 2,000 acres for Armstrong's
milli~n
of the Debtor's funds to Winthrop for
personal residence.
Ir
million was booked to Armstrong, who gave a deed of trust on the
12
property to Winthrop.
13
to the Debtor.
14
also used for improvements on Armstrong's ranch,
15 Ib
19
20
2' 22 23 24
Portions of the SlO million from the debtor were including
abou~
and for prepaid
interest on Armstrong's note. f)
In October 1990, the $68,800,000 intercompany
receivable was divided into two obligations.
One obligation is
shown on the books of Debtor as a long-term "bond" in the amount of $57 million.
The other obligation is shown on the books of
Debtor as "affiliated notes" and a "long term debt" of $11.8 million from Winthrop to the. Debtor.
No repayment of these
intercompany receivables has been found by Plaintiff to be shown on Debtor's books. g)
25
26
Winthrop in turn assigned the deed of trust
$2.4 million spent on a cutting horse arena,
17
18
A loan in the amount of approximately
S6.~
10
On an unkncwn date, Armstrong transferred some
$J million of the Debtor's funds
C""PLAINT
into one of the Armstrong
-9-
i~
Cornpanies--Oresdner Petroleum--to purchase oil and gas leases the name of Dresdner Petroleum. h)
)
Armstrong personally used funds believed
~o
4
~ave
5
Armstrong purchased a Jaguar automobile for $105,000,
6
Royce for $135,000, at charity events.
,,
for $J6,000 for a vice-president of Debtor, christine Grernbling
8 9
come from the Debtor for unauthorized purposes.
using Debtor's funds.
For example, and a Rolls
He also purchased a BMW
He contributed hundreds of thousands of
dollars to political campaigns.
He was drawing a salary of some
10
$21,000 every two weeks--Dver $500,000 a year--from his various
11
entities Which were,
12 13 14
15
from Debtor.
\8 19
20
21 22
23 24
25 26
He rented a suite at the Mark Hopkins Hotel in
San Francisco for approximately $160,000 per year.
On infonnation
and belief, all the funds for these purchases and expenses were diverted from the Debtor. i)
16
17
in turn, drawing funds for operating expenses
In December 1988, the Debtor had on its books
a series of unsecured illiquid loans to its then sole shareholder, MaxPharrna, Inc. or affiliates of MaxPharma, Inc.
These ill iquid
affiliate loans amounted to approximately $14 million.
Additional
affiliate loans were thereafter made, increasing that amount.
At
the time Armstrong purchased the Debtor in March 1989, there were approximately $14-18 million of affiliate loans on the Debtor's books.
The purchase by Armstrong closed on March 29, 1989.
On
April 10, 1989, an Armstrong Affiliate, Dresdner Enterprises, Inc., purchased the $18.9 million of intercompany receivables for a note which was backed up by approximately $1.5 million worth of
CQHPLAINT
-10-
collateral.
Hence, on behalf of the Debtor, Armstrong
a~par=~L::
~
had a period of time in which it could have sued MaxPharma's
]
affiliates for this $18.9 million of receivables.
J
the Armstrong Companies at Armstrong's direction, bought out th8se
5
receivables for notes having questionable value. j )
6
Instead, one
After Armstrong acquired the Debtor, the
7
Debtor became the primary source of funding for all Armstrong's
B
Dallas operations.
9
a month in operating costs--almost $5 million a year--apart from
The Armstrong Companies required some $400,000
10
any operating costs incurred by the Debtor itself.
II
such operating costs were obtained from the Debtor.
k)
11 13
acquire
~arker
\5 16
\7
1B \9
20 21
In March 1991 Armstrong invested SJ,OOO,OOO to
Automotive. 1)
lJ
Armstrong caused Debtor's funds to be
transferred to the Armstrong companies by various methods, including the following:
One of the Debtor's employees would
write checks payable to federal, state or local taxing authorities on behalf of the Debtor's clients.
Those checks would be
processed through the Debtor's computer, and this would automatically create a ledger entry reflecting that the check had been issued.
This ledger entry was necessary so that on the books
of the Debtor and other 23
The funds for
app~opriate
financial documents,
appear as if the check had actually been written.
it would
After the check
had been processed in this manner, the Debtor had another employee 25
26
physically pull such checks before thE! were mailed or deposited in a federal depository bank.
Instead of transmitting such checks
CQHPlAfNT
-11-
to the taxing authorities, Debtor would physically hold the
c~e~~:3
2
for an average of three months, until the next quarter.
J
end of the. three-month period, the Debtor would then void the original held-back check.
At
A new "good" check would be issued
5
covered by SUfficient new funds.
6
through diversion of clients' funds.
7
to the authorities, and this new check would have to be held, thus
8
repeating the process. rn)
9
10 II
12
13
1d
Debtor's funds to the Dallas office.
23
COUNT ONE (Recovery of Fraudulent Transfer Pursuant to § 548 and California Civil Code §§ 3439.04 and 3439.05) 32.
Plaintiff realleges and incorporates by reference
Paragraphs 1 through 31. To the extent that the claims herein arise pursuant
to Bankruptcy Code Section 544(b), plaintiff is asserting the rights of all of the unsecured creditors with an unsecured claim allowable in the bankruptcy case, which were creditors at the time of the complained of 34.
24 25
These funds were then
distributed to whichever Armstrong Companies needed them.
33.
22
If t t : cash flow showed that the
entities would soon run out of funds, Armstrong would transfer the
17
21
Armstrong's Dallas staff prepared a weekly
the next several months.
16
20
A new check would be issued
cash summary projecting the Armstrong Companies' cash needs for
15
\B
The new funds were obtained
transac~ions.
Armstrong has caused current assets of the Debtor
to be transferred to defendants without adequate or fair, and
26
Ce»o1PLA llolT
-12-
often without any consideration, while retaining all of
2
t~e
liabilities of the Debtor. 35.
]
The transfers of assets from the Debtor to the
defendants were made while the Debtor was insolvent and for less 5
than a reasonably equivalent value. 36.
6 7
8
voidable pursuant to
"
37.
Id
17
18 19
38.
n
25
the transfers are
California civil Code § 34J9,05, and Bankruptcy Code § 544(b). 39.
The transfers of assets from the Debtor to the
defendants were made while the Debtor was engaged in business or a transaction for which its remaining property was an unreasonably small capital and were made for less than a reasonably equivalent value. 40.
By reason of the foregoing,
voidable pursuant to § 548(a) (2)
the transfers are
of the Bankruptcy Code,
California civil Code § 3439.04 and Bankruptcy Code § 544(b). 41.
21 2.1
By reason of the foregoing,
voidable pursuant to section 548(a) (2) of the Bankruptcy Code,
20
2I
The transfers of assets from the Debtor to the
less than a reasonably equivalent value.
\5 16
548(a) (2) of the Bankruptcy Code,
defendants caused the Debtor to become insolvent and were made for
12 I]
§
the said transfers are
California Civil Code § 3439.05, and Bankruptcy Code § 544(b).
9 10
By reason of the foregoing,
The transfers of assets from the Debtor to the
defendants were made without receiving reasonably equivalent value in exchange for the transfers, and the Debtor intended to incur,
26
C~PLA1NT
-1]-
• or believed or reasonably should have believed that it wculd 2
incur, debts beyond its ability to pay as they became due. 42.
]
By reason of the foregoing,
the transfers are
voidable pursuant to California civil Code § 3439.04 and § 544(t) 5
of the Bankruptcy Code.
6
43.
The transfers of assets from the Debtor to
~he
7
defendants were made while the Debtor intended to incur debts
8
beyond its ability to pay as such debts matured and for less than
9
a reasonably equivalent value. 44.
10
II
voidable pursuant to 45.
12 I]
IJ
17 18
548(a) (2) of the Bankruptcy Code.
The transfers of assets from the Debtor to the
defraUd the Debtor's creditors. 46.
By reason of the foregoing, the transfers are
voidable pursuant to
§
548(a) (1) of the Bankruptcy Code,
California civil Code § J4J9.04 and § 544(b) of the Bankruptcy Code. WHEREFORE, plaintiff prays for relief as set forth
19
20
§
defendants were made with actual intent to hinder, delay or
\5 16
By reason of the foregoing, the transfers are
hereinbelow. COUNT TWO (Constructive Trust)
21
22
47.
23 24
paragraphs 1 through 46, 48.
25 26
Plaintiff realleges and incorporates by reference
By
vir~ue
inclusive. of the wrongful acts described above,
defendants have been unjustly enriched and hold the Debtor's funds
COHPlAINT
-14-
• belonging to the Debtor's estate, and any proceeds of those f~~~s, :2
as well as any assets received from or acquired with money
]
received from the Debtor, as constructive trustees for the
benef~~
of the Debtor's estate. WHEREFORE, plaintiff prays for relief as set forth
5 6
hereinbelow. COUNT THREE (Turnover of Property Pursuant to § 542)
7
8 9
49.
10
Paragraphs 1 through 48,
11
50.
t2 13 14
17
18 19
Prior to the filing of the petition, the Debtor Such property consisted
of money and other property which is property of this estate, as set forth hereinabove. 51.
The property of the estate referred to in the
preceding paragraph, or proceeds of such property, is now in the possession of the Defendants.
Defendants have failed and refused
to surrender such property, or the proceeds thereof to the trustee. WHEREFORE, plaintiff prays for relief as set forth
20
2I
inclusive.
transferred its property to defendants.
15 16
Plaintiff realleges and incorporates by reference
hereinbelow. COUNT FOUR (Injunction)
22 23
52.
24
25
Plaintiff realleges and incorporates by reference
paragraphs 1 through 51,
inclusive.
26 CC»olPlAIWT
-15-
• 53.
Plaintiff is entitled to injunctive relief
pur5~3~:
2
to Bankruptcy Rules 7001(7) and 7065, Bankruptcy Code § 105
3
F.R.C.P. §65, restraining defendants from destroying or
~~d
other~is2
disposing or altering the property of the estate, and other 5
documents and information in defendants' possession, custody or
6
control concerning the use and transfer of the Debtor's funds.
1
Plaintiff is also entitled to injunctive relief ordering
8
defendants to immediately turn over to plaintiff all property of
9
the estate in defendants' possession, custody or control and to
iO 11
12
refrain from dissipating, transferring, or encumbering assets or funds received from the Debtor or acquired with the Debtor's assets or funds. WHEREFORE, plaintiff prays for relief as set forth
\3 14
hereinbelow.
COc-NT FIVE (Conversion)
15 16
54.
,7 18
paragraphs 1 through 53, inclusive. 55.
19
20 21
By virtue of the acts set forth in paragraphs 2]
through 31 hereinabove, Armstrong has converted assets of the Debtor and by such conversion has greatly damaged Debtor. WHEREFORE, plaintiff prays for relief as set forth
22 23
Plaintiff real leges and incorporates by reference
hereinbelow.
24 25 26 CCfolPlAINT
-16-
• COUNT SIX (Breach of Fiduciary Duties) 2
56.
J 4
referens~
paragraphs 1 through 55, inclusive. 57.
5 6
ilaintiff realleges and incorporates by
As chairman of Debtor, Armstrong at all relevant
times owed fiduciary duties to Debtor. 58.
7
By virtue of the acts and conduct set forth in
8
paragraphs 23 through 31 hereinabove, Armstrong has breached his
9
fiduciary duties owed to the Debtor in
~hat
he has knowingly
10
entered into numerous conflicts of interest, has engaged in self-
11
dealing to the detriment of the Debtor, has failed to act in the
12
best interests of the Debtor, has failed to control and manage the
13
assets of Debtor in a prudent manner, and has misappropriated
14
assets of the Debtor, and has by such breaches of fiduciary duty
15
caused great damage to the Debtor. WHEREFORE, plaintiff prays for relief as set forth
16
17
hereinbelow. COUNT SEVEN (Breach of contract)
IS 19
59.
20 21
paragraphs 1 through 58, 60.
22 2]
Plaintiff realleges and incorporates by reference inclusive.
According to the books and records of the Debtor,
the Armstrong Companies have obligations totaling $68.8 million to the Debtor under junk bonds,
25 26
obligations.
promissory notes or other
On information and belief, interest on such notes
and obligations due to the Debtor has not been paid by the
CCt\PlAlllT
-17-
•
·.
companies owing such obligations in violation of the terns and 2
conditions thereof and therefore are in breach of such
3
obligations. 61.
Debtor has performed all obligations on its part
t~
5
be performed except those excused by the conduct of defendants or
6
by virtue of other causes.
7
WHEREFORE, plaintiff prays for relief as follows:
8
1.
?
10
dissipating, transferring, or encumbering assets or funds received from the Debtor or acquired with the Debtor's assets or funds. 2.
Il
12 13 1<1
17
18 19
the Trustee, and to render an accounting to the court for the disposition by defendants of such property. 3.
22
possession, custody or control and on any assets in defendants' possession, custody or control received from or acquired
wi~~
money received from the Debtor. 4.
For judgment against defendants for an accounting
of all payments and transfers of the Debtor's property by defendants to the extent such transfers were fraudulent. 5.
'23
24
for the imposition of a constructive trust on
plaintiff's funds and any proceeds of those funds in defendants'
20 21
For an injunction or order requiring defendants to
surrender the property of the estate, or the proceeds thereof, to
15 \6
For an injunction restraining defendants from
For an order avoiding all transfers to the
defendants to the extent such transfers were fraudulent.
25 26
CCtlPl>. Ill!
-18-
6.
For a judgment in the total amount avoided,
2
an order directing payment of such amount by defendants to
J
plaintiff, plus interest thereon at the legal rate.
J
7.
For compensatory damages according to proof.
5
8.
For exemplary damages in a sum sufficient to
6
9.
9
For such other and further relief as this Court
deems appropriate. Dated:
tj;kI2/ 177/ FELDMAN, WALDMAN & KLINE A Professional Corporation
10
11
BYqylu;, ;~
12
L.~. Chris Martiniak Attorneys for Trustee Frederick S. Wyle
13 14
15 16 17
18 19
20 21
22
23
24 2S
26 CCl4PLAIHT
-19-
---
dete~
defendants from similar conduct in the future.
7
8
a~j
• FELDMAN, WALDMAN & KLINE A Professional Corporation 2 ;ATRICIA S. MAR L.J. CHRIS MARTINIAK J
2700 Russ Building
4
235 Montgomery street Francisco, CA 94104 Telephone: (415) 981-1300 San
5
Attorneys for Trustee 6
Frederick S. Wyle
7
8
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA In re
10
)
BANKRUPTCY
NO.
91-31077 LK
)
II
HAMILTON
TAFT
&
COMPANY,
)
Chapter 11
)
Debtor.
12 13
----------------))
IJ
FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft- & Company,
) ) ) )
Plaintiff,
)
15
)
16
v. 17
18 19
20
21 22 23 24
25
CONNIE c. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.: WINTHROP REALTY COMPANY: CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESDNER FINANCIAL MANAGEMENT CORPORATION: DRESDNER ENTERPRISES, INC.; DRESDNER ,PETROLEUM, INC.; H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.: KNIGHTSBRIDGE COMPANIES, INC.: and KNIGHTSBRIDGE GUARANTY COMPANY, I
26
)
Defendants.
) ) )
) ) ) ) ) } ) ) )
} )
) )
} ) )
~---------------}
Adversary Proceeding No.
u.s.
Federal Bureau
In Reply I Ploa-se Refer Ftle No
~C
Departmen.
Justice
of InveStlgatlOn
450 Golden Gate Avenue
1;0
San Francisco, California 94102
September 23, 1988
Mr. Joseph P. Russoniello united states Attorney Northern District of california 450 Golden Gate Avenue Box 36055
San Francisco, California 94102
Attention:
Mr. Flay Dawson
Assistant u. S. Attorney Re:
......~
_
I~~~
PRESIDENT, dba
HAMILTON TAFT AND COMPANY, SAN FRANCISCO, CALIFORNIA; UNKNOWN SUBJECTS I dba
MAX FHARMA, INCORPORATED, 200 CRESCENT COURT, SUITE 1375, DALI.AS TEXAS;
POSSIBLE WIRE FRAUD b -: i:
Dear Mr. Russoniello:
Referenced conference between Assistant U.s. Attorney
(AUSA) Michael Yamaguch~ and Special Agent (SA)
on September 14, 1988.
I
I
This letter is to confino. the above referenced conference in which SA delineated the details of the allegation and the results or his investigation to date regarding captioned matter. AUSA Mike Yamaguchi indicated based on what was presented to him as well as his examination of documentation pertinent to the captioned matter, there was insufficient
I
I
1 - Addressee /1 - San FranClSCO ((196A-2868)
RES/bfa (2 )
Mr. Joseph P. Russoniello
evidence to support a violation of federal law at this time and AUSA Yamaguchi added if further information could be obtained regarding the allegations presented, he would reconsider his opinion. he would therefore decline prosecution.
Based on AUSA Yamaguchi's declination, our office will close its investigation into the captioned matter. Very truly yours, RICHARD W. HELD
Special Agent in Charge b7C:: By:
I
Superv~sory
2*
Speclal Agent
f
.
~ /
.'
---
( I2IJII199j)
FEDERAL BUREAU OF INVESTIGATION Precedence:
To:
San
From:
PRIORITY
Date:
Sacramento Contact:
SA Will Hatcher
Attn:
FranClSCO
IA
1"'--
02/10/1997
....
Approved By:
t ., .-.
; ,'I~
Drafted By:
_-
Case ID #:
196D-SF-93255
Title:
.....1 epg
(Pend~ng)
CONNIE CHIP ARMSTRONG, JR.;
I
IFormerly dba HAMILTON-TAFT COMPANY FBW (D); MF; ITSP 00:
synopsis:
SF
Caples of FD-302s and inserts enclosed from Sacramento
flle 196B-1364.
Reference:
Enclosures:
196D-SF-93255 Serial 124
FD-302 of of of of
·FD-302 FD-302 FD-302 Insert FD-302 FD-302 FD-302
at of of of FD-302 of FD-302 of FD-302 of
Ion 2/19/86 Ion 3/12/86 Ion 5 /23/86 Ion 6/19/8 6 ~uaene
Oreaon from 5/1 4 - 6/18/86 Ian 6/2 5/86 Ion 8/7/86 I,on 9/17/86 Ion 3/31/8 7
Ion
Ion 3 /25/87 4/7/8 7
A review of closed Sacramento flle 196B-1364 revealed the above enclosed FD-302s and inserts .
Details:
••
NO. ~~STRONG,
CCNNIE C.
§ §
and ~n the Riqhc Of ~PPJVl~, r~c" and PJL~ILTON-TAf~ & :~dividual~v,
a~
Lease
Febr~ary
S 9,
1989, as Q 5hareholde~ in y-~ P HA.RJ.4_~ , 1: ~lC . ,
?laint::fs,
v. ~_~_XP?-AR..I..(_~,
INC.;
&
CHRISTIANA
C~~ANY;
l-iA:~!:..r8N-7MT
C8RPORATION; :r! S ION KEYSTONE F INANC :.;L C:RPORATIONi CR ACCU:SIT:ONS, E~IERGY
I
L~C.; LAwRENCE 8" C:S~~LLai C. ~AYNE Lr~C~FIELD; ?£G~Y f. CA:T£1L; TI~OTHY w. =EL~;
A.
F~DrD;
CR. ?5.
~~~SAD; and JOHN H. ~CeERTS, e~c~ respec~~vely CCt~ i~=ividual!y
JR.;
and as
of ~~~?~~~~, :~:C., ana ce:.-ivac':'":el.y therefrom ~~c as d result of :~2 cant=ol
S~~==hclde=s
~~=~=ot,
c~nc=~ll~~~
:harehalders
& C:.,
~:
~~~!:~ON-TAFT
dC,
lease Febr"..lary 9,
U.s. v ARMSTRONG CR94-0276 _ CAL '
chr~ugn
:989
FOWLES
GOVERNMENT EXHIBIT
S
elC. i
~C~JLv~Q
IN THE DISTRICT COURT
§ § § § § § § § § § § § §
CC~ANY,
~~=cugh
/ ....,
161
JUDICIAL DISTRICT
§ § § § § § § § §
S S § § §
S
Defendants.
§
DA.L.:.-;S COUNTY, TEXAS
-
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST T~ORARY
~c
T~£
HONORABLE JUCGZ OF SAID COURT:
COM.ES and
NOW,
che
in I
t.;;==u.gh
at.
CCNN r E C.
=ight. leas~
;::E
ARMSTRONG
~.AXPH...~R.!-'..A,
:ebruary
9,
( .. A.R-'!STRONG - ),
INC. 1989,
and and
Indi v iduall y
HAMILTON-TAFT as
APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PE~~ENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
&
Shareholder
PLAINTIFFS' ORIGINAL PETITION,
T~~ORARY
Page 1
CO. of
INC;. ,
~!AXPHAR~,
Pet.~tion,
Applicat.ion
the
for
for
Cour~
and
Temporary
ImposiT:ion
in
and
("ARMSTRONG"),
Application for Temporarj
Applicat:ion
shc~s
?laint.iff
for
Res~raining
Order, Ex
Permanent.
rnjunct.ion,
Const:=uc~ive Trust.,
of
Original Par~e,
and
respeccfully
t.hereof as follows:
suppor~
I .
PARTIes 1.
,A.R..~STRCUG,
?laint.:'::,
cr >!..;X;:i.A.R.'-!A,
LAWRENCE Da~las
indivicual resid:ng in President. of
her e i:l by s e !:"v in g h i
:: 2 : -2
d
n c: a. r. ': ,
·::':'=ec,;;::-
2r
C=e5cen~
him dt:
~:1
Courc,
~lcce
be
of
business
~e~Jed
an
10 cat 2 d
INC.,
may
':'n
and
a
ser'.red
place
( .. LITCHF ! :: L => " ),
in Dallas, his
member of
it.s
process
;..rith
business,
of
:.. 5
an
Board of herein
located
dt:
by
200
Texas 75201.
ROBER.7:S,
Dallas
dt
be
~allas,
:OHN
with process
L : T c: :::: :: =: :. J
Oklahcrna City, Ckl.ahcma, and is c:l===ntly
Suite 1300,
residing
is
his p r inc i ? a 1 ? 1 ace a f bus in e s s
COSTE~~O
~rincipal
Detendan~,
irlcivicual
t
pr~cess
:!..AX?:t.ARl'A..A,
his
("COSTELLO")
Caunt.y, Texas, and is current.ly the
~'\j' AY~ IE
C.
LITC~:~£LD
ser:ir.g
COSTELLO
Suite 1300, Dallas, Texas 75201.
Ccu=~,
:-esid':'~.g
l.:-,,::':".":';:uc2.
at
1T1
B.
may be served wit.h
INC.
~~XP~~~~~,
dt. 200 C=escent
indi'/idual and shareholder
an
residing in Dallas C:Junt:y, Texas.
INC.,
DeEendant,
2.
is
County, Dallas
JR.
':'exas,
County,
princi~al
("ROBERTS"),
wit.h his Texas.
is
an
principal
ROBERTS
may
place of business at 200
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 2
Cour~1
C.=escen':. d~
<0=
his
mat.e!"ial
herei.n,
~cre
has
deSl';:1dt.ed
1:1 -:!".i s
3737
engaged
Pot.omac,
Dallas,
HADrD
("HADIO·),
cause.
en:.e=ed
in
Dallas
t.imes
HAOID does nat. maint.ain a
c.:..:.e
Fe=::.::n
'",ho
is
note
:::-::;s
::as
over
C:::-'.:'=:Jl
mc='i.:~c=.tions
d
Nat.ional
:.ne
=-=-:.~.!:::'CN-TAf:'
.::::nt.i:1ui:-.g by
(d)
=esident. of
by
~ot.e
now
::::a=:.
0f
Stat.e of Texas.
the
HADID
while
due
and
in
in
Callas,
payable
the ::a5 is c
=
because
Texas
breach of his dut.y to
the
lending
t.he
che
Dallas
~ay
(b)
~ashing-r.:Jn,
in
~A..AXPP..A.R..\(.A.
Secrec.,ary of
the p=omissory
P-ADID
effecr.uat.ion
of
,UNDS
P.S.
having as
a
Texas
EJRASAD
received =esu I t o E
Acc~rdingly, ~ID
may be
provi.ded
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION
TEMPORARY RESTRAINING ORDER,
FOR TEMPORARY AND PERMANENT INJUNCTION, AND kPPLlCATION FOR IMPOSITION OP CONSTRUCTIVE TROST
a of
as ;.Jell as
of
is
ROEER.TS
ty
bet.·",een DR.
Stat.e
Da.llas
:.he causes c:: act. ien
through
n.CCOUNT
P..ADID
Ccunt.y,
in Dallas,
acquisit.ion
agreement.s
C8NCENTRATION
inter-est.
s.;!!:":i.ng
PRASAD,
Sank of
c.:.
&
facili.cated
?S.
JR.
co
and
herein arose from or are connect.ed
ccmmi:.:.ed
~D:Q'S
':'=x~s.
·.... ne['.
C':':'E:S
a.ll
at.
:n addition,
:-.':'5
Count.y,
in the Stat.e of Texas,
business
a
not.
t=r::missory
~:-'d':.
and
I
is
asser~ad
ac:.£
a
int.:J
C:::":':-'.:.y,
a:1c-
75201,
Texas
agent: on ...... hom service of cit.at.ion may be made
!'I_""DID
?u~~osei!Jl
',.;i:.::
A.
described below.
causes of ac-::cn
::: ':.=
at:
Dallas Count.y,
place of business or residence in the Stat.e of Texas,
:;'0
Texas
Dallas,
1
~OH~\f.ED
par~icularly
~eqular
T~e
=esidence
Defendant,
5.
has
13i'5
75205>.
T2xas
as
Sui~e
Page 3
t.ha.t.
t.r.e
cication
addres s
at
6.
1300
!?et.ic.ion N.
Defendant.,
hereto
material Beard.
anQ
of
and
17th
DR.
cic.ation dsser~ed
dC~S
be
:nay
through
his
~.AXPHARMA
~n
below.
made
in
by PRASAD
original
basis
conduct
may
~=:::'lided
ce~~ified
~?H..A.RJ-f.A,
be
place
Fifch
times
all
the
material
Texas /
not. mainr.ain
as more a
place
cause.
causes
The
in
assist-ing
':.0
the
cause
asset.s
of
aC't.ion
c.he purposeful·
he has
facilitaced ~o
ROBERTS
t.o acquire
acquire
~~~ILTON-
fV.}!ILTON-T.~fT/
ant
exerc:'se in good fait.h and ·.... l:.~ due of
duc.ies
as
~hich
of
more of
direct-or
a
con't.rolling
and
fully descr.:.bed
below
According 1 Y ,
action.
is
che
De f e ndan t.
cited by serving t.he Secret:ary of State of Texas
that. the
p=:. .... ci.;;al
(Jest.
fiducia.ry
Plaintiff's
of
PR.ASAD,
400
of
at
in Texas because (a)
subsequenr. :ailure
shareholder
and,
a cor?orac.e shell through
c.he
Virginia
was a t a l l cimes
J
from or dre connect:ed with
::-.erea::er dissipace
di':"':"gence
Rosslyn,
in Dallas County,
chis
:'.~_::'
t~E
office
home
Texas and has no agent. on whom service of
as
(t: \
HADIO'S
1100,
PRASAD does
~~~p~~~~~
=.r.c'
Suite
too
PRASAD ( .. PRASAD" )
in bus iness
herein arese
comrnit~ed
Streec,
P. S.
of
par~ic~larly desc=~bed
of =egular business
for..;arded
is believed t.o cur:=ent:ly be a member of
Direccors
here in / has engaged
dre
ci~at:ion
of
and pet.i:.ion are forwarded co PRASAD' 5
business,
Street.,
KEYSTONE
Greenville,
FINANCIAL
Nort.h
CORPORATION,
Carolina
27834,
mail, return receipt. requesr.ed.
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 4
by
Defenda.nt:,
7. indi v idual
wit:h
res iding
cit.at.ion
8.
Count:y I
Dallas
her principal
a.t.
Defendant,
ccr;o=at.icn duly
is
("CATTELL"},
Texas
a.nd may be
I
place of business,
of
':'axas,
regi.s~c:!:'ed
MAXFHARMA,
fo~ed
and
Tennessee
Stat.e
in
CATTELL
f.
200
an
served
Crescent:
Suit.e 1375, Dallas, Dallas County, Texas iSlOt.
Cour~,
of
PEGGY
is
a
and existing under t.he laws of t.he Stace
duly
au'thorized
and . may be
aqent:,
{"MAXPHARMA"},
INC.
i:..,.;WRENCE
t:o
t=ansact
business
served '''/it.h cit.at:ic:l by 3.
COST::UO,
at
200
in
t.he
serring it.s
Crescenc
Cour1:,
Suit.e :300, Jallas, Dallas Count.y, Texas 75201.
i.s
d
&
("H.A..'1ILTON-TAFT"),
CO}!FANY
c:::-::orat.ion duly for:ned and exist:.inq under ehe
at
Stat.e he=e!..;., ~;e~~
HA.."1IL:'ON-TAFT
Deiendant.,
9,
Calif:rnla.
has
~~
engaged
::use. ~:'''':·::::':~i-:.;.r!,
=y
fJ_~~! :':CN-:'AFT
e:e!'::: =::lance
The
arose
business
from
engaged
wi 'th
:·..1r~her,
~as,
~::~ized by ~~ans
causes of or
HAMI LTON -TAFT
ar.c.
i:1s.:.':e=
in
in
at:
Texas
0.1:"
t.imes
l':as
and
no
of t.he
mdt-erial
des ic;nat:ed
Scace cf Texas an whcm service Cl:at.lon may be made
:~e
c ~;n~.:. ~ ~ ad
HA~ILTON-TAFT,
~aws
in
res pec t:
because
are
acr.ion
assert:ed
ccnnecr:ed ·,..rith
in
Texa s
becd us e
loan t.ransact:ion, 'Co
which
·,..,as
herei:1
a<;alns't
t=urposei:Jl
acts
:-tAXP HARMA
and
through nominees,
the
due,
in
P..A..'1IL:'ON-TA.FT permit.:.ed
part:,
lese1 f
in
t.::l
Texas;
be,
and
ROBERTS and COSTELLO as a vehicle for f~nding of
may be cit-ed by serving che Secret.ary of State of
, PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR Tf~ORARY
RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 5
,
•• w
......--
Texas
prav ided
cha e
regiseered
HA."!ILTON-TAFT'S ~~ay,
Albert: L. 9~102, by
and
agen-c
peei tion
in
the
567 Golden Ga'Ce Avenue,
Defendanc,
fo~ed
VISION,
at
~exas,
California,
or
is
("VISrON")
INC.
a corporation
Cert.~ficate
or
fram the Secretary
Au~hority
t~ansact
business in the
and may be served with citat.ion in this action by
ciCct:on upon its
~eg:stered
its
of
to
San Franc isca, Cali farnia
c: State c: Texas, is duly aur.horized to
se~:ice
State
fa rvarded
and existing under the laws of che State of Delaware.
VISION has cbtained a
5cace cf
are
cerr.ified mail, return receip-c requesr.ed.
10.
duly
the c i ca. cion
PEGGY F.
regis-cered agent, Cour~,
office, 200 Crescent
CATTEL~,
Suite 1JiS, Dallas,
Callas County, Texas 75201, 11. i
Defendanc,
··::::~ISTL;JIA.··), ~a .... s
:'.-.2
:ne:.e~ial
: f.
r::.e :::':'s
engaged
in
CHRISTIANA,
busir.ess
CHRISTIANA
cause.
Despite
the
serv ice
fact:
thac
f
0
at
all
Texas,
not.
was
designa~ed
noc
as
more
maint.ain
c i ca cion may be
it.
ci.mes
a
agenc in made
licensed
t.o
in
do
in t.he Stat.e of Texas, CHRISTIANA execuced and delivered
;::romissory
not.a
Dallas
Ca~las,
on whom
in
does
of =egular business in Texas and has no
=~s':'r.ess
a
has
Delaware.
desc=ibed below.
5 ta 1:e a E Texas
CORPORATION
ENERGY
a carpor-acion duly for:ned and existi!19 under
che Stat.e of
::e.:-ein,
::a=-::cu!.a=~y ~~ace
is
CHRISTIANA
in
Dallas,
Count.y,
Texas.
Dallas That.
Texas,
Count.y,
noce
is
payable
t.he crux of
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANeNT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TROST
Page 6
in the
ass~~ed
causes of action of
act.ion
asserted
c =mrni -: t.ed
ac -: s
for
nominee
by
which
cf
pec::':'on are S:.a:.e
of
fo:r....arded
Delaware,
:.
Ce rendant.,
fo!:ei~:1
~~:==
~c
a:
~:'1
as
~cre
The
:nay
causes
encity. cont.rolled
enc~cies
ACCOUNT
,,-::at
affiliat.ed with
the
regist.ered
Ltd.,
Incorpcrators,
by
FUNDS
c':t.ed by ser-Jing
be
a
is
CHRI STIANA
CONCENTRATION
prcvided
the
cieat.ion
and
in
t.he
Coffee
Run
agent.
Lancast.er Pike & Loveville, R.D., Hockessin,
KEYSTCNE
ret~rn
receipt request.ea.
FINANC:.u CORPORATION
("KEYSTONE ~) ,
t.he st.ate c: fcr:nat:ion and exist:ence of t.o
is known and is
requla~
cecause
corporat.e
CHRISTIAl~AtS
Plai:1t.i.ff,
although
a.
d~~cged hereinbelo~.
principal KEYSTONE
I
has ango:iged :':1. bus iness in Texas,
par~icularly de5cri~ed
belew.
KEYSTCNE does
nee maineain
business in Texas and has no designaced agent
Stat.e of Texas on whom service of citat:ion may be made in
cause.
c:::-.:-.ected
The
;..rith
by
causes
purposeful
cec~use KEYSTONE
C·..Ii.ec
t.o
:.i..'Tles rna 'ter ial herein,
:~e
..... _::
Texas
corporation,
=~siness
a ;:dce of :~
a
Texas
CERISTIANA
;resently unkncwn
i.s
'''/:-.:'=:-.
is
19i07, by cert.ified mail,
: 2. ~=
in
indivicuals or
of
State
?=c:essional Cent.re, Ce~=~are
pu~oseful
HAMILTON-TAFT
Accordingly,
Sec:-etar'l
from or are connecced with
and
have ceen dist.ributed to RC:C::~TS.
The
CHRIST!ANA
ROBERTS,
through
RCEERTS
arose
herein againsc CHRISTIANA.
PRASAD
of
acticn
aces
asserted
ccmmitt:ed
arose
by
f=om
KEYSTONE
are
or
Texas
in
is t.he nominee shareholder of record for shares
and
MAXPi'iA.R}(.A.
Accordingly I
KEYSTONE
be
may
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST TE~ORARY
Page 7
._-._-- .. ".
'
-._-----
cited =y serving
the ~ Secret.ary of
the ci:.at.ion
petition
place
of
Caroli~a
business,
27834, by
place af
c::m..rni ~ :ed by
arose
BELL
( 2 a ~)
shareholder
INC.,
the
Q
and
j
:.:-:e St:c=etary
f
in
Texas
wi th
I
t.he
of
in Texas
is
an individual
SELL does not maintain
anc.
has
no
agent on whom
:his cause.
i.n
Nort:h
=eceipt requested.
("8ELL~),
BELL
because
present.
(a)
he
shareholce.:-
The causes
is
a
f
in CR
I
of
of
may
access
to
-:'exas
financing the
shares
Spo~swood,
and for of
be cited by serling
~ay
provi:ied
ONS,
HAMILTON-TAFT,
sources
have
ACQU~SrT!
~hat
the cit.at.i::n and
New Jersey 08884,
by
cer~ified
133
mail,
reques~ed.
ccmpany duly
I
CR
ACQUISITIONS,
fo~ed No~ember
Dallas Count.y,
9,
rNC.
("CR
ACQUISITIONS")
I
1988, and existing under the
~ith
its principal place of business
Texas,
and may be served with citation
the State of Texas
in Dallas,
0
twenty percent
princi.;:a.l
Defendanc, cELL,
State of
De fendant
lot.
laws at
Greenville,
are forwarded to BELL'S pr1.nci?al place of business,
retu=n receipt
d
St:-eet,
~eturn
provided that
to KEYSTONE'S principa.l
adci t iana 1 options
accordingly,
C=escent Avenue,
is
w.
Texas
from cr are connec:.ed with purposeful acts
Acco~dinglYI
pe':.':'~:":Jn
mail,
current ccntroll:":lg
one
~C=::R.TS
TIMOTHY
fifth
citation 'may be made
asser~ed
is
West
regular business
serlics of
(b)
forwarded
in Plano, Collin Count.y, Texas.
resid:~g
ac:.:on
400
a.re
cer~ified
Defendant,
lJ.
a
and
State of
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..1o£PORARY RESTRAINING ORDER, EX PART!, APPLICATION FOR TE.HFORARY AND PER.M.ANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 8
by
in ~his ac~ion
service of cication upon its registered agent,
PE~·{
f.
SUi~2
1375, Dallas, Dallas County, Texas 75201.
CATTELL,
at
registered office!
its
Crescent:
200
Court:,
CASE OVERVIEW ~S.
This
indi'Jidually cant.=olling
case and
the claims
concerns
derivatively,
persons
I.Iho
have
by
a
shareholder,
against.
of:icers,
engaged
in conduct constit.ut.ing
direct.ors
and
tet.al abandonmenc and" disregard of :iduciar/ duties, to init.ially "' 1.00 t "
t.r.e as 5 et.s the
consr.:"t.ut.es ccmpany of
which
0
f. t.he who 11 y-owned corpora toe subs idiary which
primary
asset.
of
Plaint.iff is a
t.he
publicly traded
shareholder and, ·..Jic~out.
di'/est. t.hat corporate subsidia.ry
most.
shareholder
parent:
recently,
a~9r=val
and
in sucj a fashion as co const.it.ut.e an abdication and violation of fi.c·~=:.a_f
dut.ies
:5.
Derendant
inc':":lduals
pul:':"':"cly
held
M..a..x:::_a..R..'o(_~
his
or
minoricy shareholders of 7:he parent
t.he
ccrpora~ion.
ROBERTS,
affiliat.es,
corporat.ion,
th=cugh obtained
through
a
nominees
and
coneral of of
series
cC:J.t.=:lllea
~..A.XPHA.R."'!.A,
transac~':'ons
a in
ROBERTS arranged for HADID, an individual with whom he had
busi.:less
of
~o
held and traded
put::=~y
whic~
awed
::~SAD
dealings, ("PRASAD")
associated
int.erest
in
to with
assist.
:.he
majority
shareholder
=:egard t.o refinancing the
with ~he
ZWf~XPHARMA,
initial
in
indebt.2dness
acquisit.ion by PR.A.SAD of
exchange
for
which
financial
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TI:MPORARY RESTRAINING ORDER,
ex
of
PARTE, APPLICATION
FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 9
as sis t:ance right.s
acqu i red
ROBERTS
f
de
vat. ing
aCl:O
the majority int.ereses derivative
of
dis position
and
from his control of
t.he entit.ies and individuals involved.
17.
At. or abou t.
con't=ol of
t.ime
the
MAXPHARMA,
which
Ccmpany but.
was
divesi:ing
pe!'iod
when
pr=~ert:y
a
at:t.emptinq to ef fect.uat.e
"cash rich"
been
theret.ofore
payroll services CIGNA
by
owned
Insurance
to which CIGNA was seeking a purchaser, as CIGNA itself
non-insurance
of
had
CIGNA.
sust.aineci
rei-at.ed
asset:s
subst.antial
during
losses
in
a
the
and casualty insu=ance businesses.
18. of
as
had
also
was
ROBERTS
the acquisit.ion of HAMILTON-TAFT,
company
-=.he acquis i tion by ROBERTS of
f
0
Ear a i:=ansac'tion wherein cash asset.s
COSTELLO arranged
lJould
HAMILTON-TAFT
be
used
in
"reverse
a
repossession"
financing arrangernen't whereby said cash assets t.hemselves serJed as
~he
RCc£R.TS
means could
I
t.o
p u ~c ha s ed
treasury
invest.ment.
banking
sueject
t.he
TAFT
debt.
of
an
t:=ansact.ion, investment.
s ecur i firm
fait.hful
as
a
1: ie 5
·,..rith
banking
performance
firm,
we re
rights by
:-egard
the
cash of
the
wh ic h
satisfact.ion wit.h
con'tralled entity
ut.ilizing
:tA.'1ILTON-TAFT
this
In
transferred
to
~~XPHAR~A,
purchase
HA."!IL70N-TAFT.
was
which
by
of
asset.s
of
HAMILTON-TAFT
which
t.hen
in
he Id
repossession
~PHARMA
co
of
manies
and
by
turn the
t.hereon
fLa..MILTON-
paid
by
the
invest.ment. banking firm to CIGNA in sat:isfac'tion for t.he purchase
ot
P~~ILTON-TAFT
by
MAXP~~.
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION rOR T~ORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TROST
Page 10
19.
Once
for
ar.::anged ROSER~S
ROBERTS' had
the
acquired
acquisition
by
MAXPHARMA,
and
of
:-L\XPHARl"..A
t.urn
in
HAHILTON-TAFT,
then proceeded to remove the existing Board of Oirec~ors
for each company and replace them with COSTELLO and LITCHFIELD. 20. receives
tax
a
for
payroll
from
withholdings
account.s
in
funds
is
f{A..\!ILTON-TAFT
s erv ices
company
whic h
retains
t.hose
cust:cmer ciient.s,
subsequent
~a.yment,
is
entitled
co
ea.rn
interest on ~hose funds, and ultimately prepares returns and pays taxes, for
in
any
exc~ange
penalties
filing.
1:1
largest
'Chis
for which
respect,
companies.
(SUC:1
as
redai~y
After
P.&"!ILTCN-TAfT
funds
the
ot.he~
di=ect.ly
busi~ess,
contra~1
to
during
~o
be
dist.ribut.ed
a.ffiliat.ed
had
~han
no~
0:
not.es)
the
which c:;ul::'
of
MAXPKAR.'1A
from client.
for:n at
en~it!.es
of
secure assets
approximat.ely
1988
cont.=ol
be
tax obligat:=r.s.
control
removed in
the naeien 's
ut.ilized cust.cmer
ac~iring
mee~~~q clien~
acquisit.ion
of
one
11ab ie
imprc;:er
to
respec't
is
t=easurj
or
bones
caused
were
HA..'1IL:'ON-TAET and
or
f~ILTON-TAfT
ROBERTS,
by
with
ce
to
acquisition of
the
=edeemed for purposes of
21.
in
co
for any purpose
government
resul-c
1-!&.'1ILTON-TAFT
Prior
HAMILTCN-TAFT by R08ERTS,
acc=unt tunas
may
which
agrees
fWiIL7CN-TAFT
loans
wit.h which
S14
:nil.!.ion
acccunt.s to
and
of
~.AX?~.AR."!A
R08ERTS
did
all for t.he benefit of the interests of ROBERTS and all to the
in~erest.s
of
~he
shareholders of
MAXP~~.
I
PLAlNTIPPS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, ex PARTE, APPLICATION FOR TnO?ORARY AND PERMAlfENT INJUNCTION, AND APPLICATION FOR IMPOSITION OP CONSTRUCTI~ TROST
Page 11
¢sa
22.
As
consequence of
a
"lao-cing" of HAMILTON-rUT at
the
the direc~ion of ROBERTS, HAMILTON-TAFT was placed in jeopardy of being
unable
j eOFardy,
t.c
funds
purpose.
to
ROBERTS
Ant::nio
a
face
obligations.
required
Stanley
value
a
result. of
this
at tempe some means by whic h
t:)
of
shor~-t:erm
thac.
serJices of a goad friend and San
Rosencerg
D.
of
As
accom~lishmenc.
assure
engaged the
act:crney,
in
it.s
meet.
1-'..A.XPH.A.RJof..A was
obtain
loan
co
5625,000.00,
to ob'Cain a
(ROSENBERG),
as
to which approxirnat.ely
5:00,000.00 ·,..,as actually ext.ended {"FIRST ROSENBERG NOTE"}.
was
loa n
use d
tom e e t
from
cerivative
HA~rLTON-TAFT,
t:-ansact.ion, sha~e5
of
:1.0SENEERG
23.
the to
fulfill
In
appearance
a
good
County,
Enerov
C!'-.::-:'stiana
and
John
Texas,
H.
one
1988,
I
faich
wholly-owned
hundred
As
subsidiary,
(100\)
for
bee~
r
an
this
of
:~e
purpose
of
co
eniarce
ics
the
FIRST
for
this
crea~ing
the
ri<;hts
the wit.h
made, MAXPHARMA iniciat.ed suit in
styled !-!axcnarma,
Jr.
obtained
:-toha..'1led A. I ndi'l idual
Inc.
v.
Hadid, [the
Vislcn, an
Inc.
I
fr.ci'.ridual,
.. MAXPHARl".AI ROBERTS
seeking collection on indebt:edness owed by
SUIT")"
~x P HAR.."!A
f
part a f.
percent:
cE=proval rias
effort.
Cor~orat.icn,
Robert:s,
ir.s
0
to be pledged as collateral on
respect to loans which had Dallas
obI i gat ion S
cbligat.ions.
shareholder
Sept:emcer
of
it.s
caused
~~~ILTON-TAFT
No
or
inability
ROBERTS
NOTE.
s h 0 r t - t e rID
This
ROBE~TS
which
I P~NTIFPS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 12
Ci
Had ROBERTS repaid the amounc which ~as due
was chen in default.
~PHAR.MA would
and owing,
FIRST
the
::Jeg i n
NOTE,
ROSENBERG
transferred co
ha.ve
effect:uate
pledged collat.eral
rep leni s h
the
been in the pes i tion to sa tis £y
on
funds
the
to
fully
~art.:es
of
and
ccmpletely
reacquisition of
had
T~e
celat.e
been
cha various
24.
f~nancial
In
the
relat.ionship
=e1ie£
as
its
as of that time,
cr
f=::'er.d
1988,
ROBERTS
rest:rainlng
~C5ERTS
been
:ransierred
had
mismanaged
detri.:nenr. represent of
enti-ties, of
the
ROS£NEERG,
thee
sought.
XAXPr;..AR.."iA
of to
;:;asition
the
to
.:-!A.XPHAR."!A.
the
Cour1:
~nd
business
ROBERTS.
the
from
:.aken
transferr:":lg
Alt.hough in
the
in
ROEE~TS
in
ROSERTS
chat
lawsuie was
ROBERTS
(b)
nature
and
had
and (c)
failed (a)
exercised
extent
themselves
co
to
::=eated
the
was
~aQ
~hen
pct.ent.~al
to
acc'..lrately
the
nat'.Jre
the
the
ac~:ons
the fact that the management. of
and
-'cari.ous
financial
PLAINTIPFS' ORIGINAL PETITION, APPLICATION FOR TeMPORARY RES~NING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
any
~.A.X?HAR.'4.A
the
over
which
of
pleac.:.:-.gs ',Jas
subsequently,
What
·,."hich
ROBERTS
thae,
0ppQr~unity
concrol the
?laced
imposi::.on
had developed a business opporcunity which
~~?HA~~,
,
the
-,Jhol1y-owned subsidiary,
assets :0 satisfy the FIRST ROSENBERG NOTE.
for
of
danger.
December,
injunccl.ve
c0r.lduct.
from
pleadings in the lawsuit
indebtednesses which had,
HAMILTON-TAFT,
and
substantial
exten~
di vert:ed
:0 ene another and the fact.s associated with the c=eacion
!-'.AX.P~.AR.),l_~
d
the
fIRST ROSENBERG NOTE, and
whic h.
HAMILTCN-TAFT in the form of loans. fail
the
and
hazard
~~PHARMA
Page 13
.'.. --.. .
_~----::s-=::s-=
and HAMILTON-TAFT under the been such as
~
to
direc~ion
and conerol of ROBERTS had
loot" HAMILTON-TAFT in such a way as to
crea~e
the appearance that the diminucion of the value of HAMILTON-TAFT had been enable
result. of mismanagement. by MAXPHARMA and,
the
HAMILTON-TAFT
a.ssets
t.hese
process 1
(i)
obtain
under
the
ruse
had l
and (ii)
ac~ion
TAFT
to
ROBERTS
in
viable
as
MAX?H.ARMA
that
occurred as
the
entity
client:
with
shell
without
it any
exisci..:-.g
ha.d
been
assets
of
to
orches~rate
base,
the
and
leave
acquisition
t.he
a
of HAMILTON-
shares
before
and.
from
result of !'iAXPHAR-"'1..A'S
a
=use, to then
tha~
cash
of
1:he acquisition
ROBERTS could aCq"..li=e
the
HAMILTON-TAFT,
quantities
guise
and
as a result of
whereby
a
fact,
large
thereby,
detriment.
of
of
t:.he
Dresner Corpora t ion,
had
shareholders of the publicly held MAX?KARMA. P 1 a i n t iff
25. ~resent.ed
a
A.R.J.!STRONG,
through
MA.XPH.A..R.1J~
proposa 1 to
fc~
the
purchase
0
~?~-A.fL\,l..A
f
shares and c=~trol of the ~PHAR¥_~ coard in consideration f~r 53 .• 1 .
which
m~l._~on,
•... ould
stUn
ROSENBERG
NOTE
operating
capital
dnd
(b)
for
have
readily
pro\Tided
(a)
approxima1:ely COSTELLO,
MAXPHARMA.
nominee and controlled person of
ROBERTS,
business
the
oppor't.unit.y
HAMILTON-TAFT, R08;:RTS
to
to
sust.ain
sat.isfied
:IRST
million
S2.5
still
the
as
de
in
faceo
=efused to accept this
operations of
!'tA.XPHA..R-~
and
and ins1:ead proceeded en a course to seek to cause repay
t.he
ouc.standi:lg
debts
due
and
owing
to
MAX p H.A.R1wf~ • J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR T£MPORARY RESTRAINING ORDER r ex PARTE, APPLICATION FOR TEMPORARY AND peRMANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 14
.
26. Cour~
the
In
in
late
corporate
opport:unity
opport.unit.y
mismanaging
t.he
for
t.ransferred,
recur:1ed
co
sat.is i.y
ROSE~BERG NaT~
13
1989
I
of
sar.":"sfa.ct':"cn
then
Temporary
from
I
the
·.,rhich
ROBERTS
had
of
to
ha.ve
t.he
HAMILTON-TAFT effor~,
ROBERTS
res~raining
Order
Foreclosure
wit.h
ou~li~ed
capital a.s
suit
in
B. COSTELLO, C.
l'4.AXPP_h.R."tA,
was
any HAMILTON-TAFT assets on
the
to
FIRST
A.
I~IC.,
HADID,
Collin
and
~on~ague,
Count:y,
i.nfus:.cr.
LITC~:IELD,
INC.
his
Texas, of
tor of
sec=er.ary,
st.yled
MAXPH.AR1'.A,
JOHN H.
Indivicuallv and as
HAt."1ILTON-TAFT,
negotiate
above.
Shareholder
wAYNE
bot.h
r.ot.e
t.o
1989, AR."!STRONG sold his sha=es
Pat.ei C.
to
and
efforts
Rosencerg
first:
Individually
~OH.AM:ED
MA.XPHARMA
cont:.rol
NOTE.
t.he
that
Res'Craining
using
and cont.inued
consideracion
filed
Montaaue,
anc
a.
On or about January 23,
valuable
LA~RENCE
and
developed
t.ransferred
then .souqhr.
ROBERTS
c:he
acquired 500 shares of MAXPHARMA on or about.
add:~:~nal c~e~ating
28.
and
had
to
was set. for Ja.nuary 27, 1989.
~~STRONG
27.
M.A.XPHARHA,
In conjunct:ion with 'this
ROSENBERG
FIRST
ROBERTS
opport.unity
rescinded
obtained
the
that.
MAXPHARMA,
which
from ut.ilizing
MAXPH.A.Rl-f.A
who
of
all
ROBERTS.
succesz fully
fer
to
represent.ed
ROBERTS
SUIT for
business
transac'tians
January
1988,
the :-£AXPHARHA/ROBERTS
corporat.e
prior
December,
and VISION,
Pacty
INC.
v.
ROBER!S, :R.,
Shareholders INC.,
as
of
Parcy
I
P~NTIPFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
POR TE.KPORARY AND PEJUtANENT INJUNCTION, AND
APPLICATION paR IMPOSITION OF CONSTROCTlVE TRUST
Page 15
"ouc
De fendant:s,
and
rest.raining
ROBERTS
from
Order .was
Rest.raining
a
obtained
Temporary
act:ion.
furt:her
dissolved
t.he
Order
Restraining
This
Temporary
next. day upon
a
Plea
In
Abatement. with respect. to the Dallas Count.y case. 29.
9:55
At
on
a.m.
morning of
the
t.he offer of ARMSTRONG out.standing, sa tis f ied
Gardere
t.hrough
usi~
Wynne
&
payment.
a
t.rust.
and
wit.h
the FIRST ROSENBERG NOTE was
t.he
via
foreclosure,
Texas,
Dallas,
fund check,
law
the sources
fir:n
of
of ·,.rhich
was then unknown. 30.
On
~~STRONG
30,
January
1989,
and
for
valuable
consideration,
reacquired the MAXPKARMA shares which he had previously
held. 31 . firs~
February
a f
As
time from Ms. Fran
14,
1989,
A.RH.STRONG
learned
for
the
president of HAMILTON-TAFT far
Bar~lett.,
many years, that: Due
d .
be
init.':'at.ed
MAXP~~
in
order
to
bankr"Jpt.::y ·....ou Id
t.ha't
preserve
the
st.ock
fac~
interest.
t.hat ROBERTS had
NOTE,
t:he
funds
and
to be
t.rans ferred
assets
president:
of
approximately
purpose
of
to
sat.isfy the
HAMILTON-TAFT $560,000.00
to Gardere
satisfying
the
&
in
FIRST
caused
some
ROSENBERG
personal
HAMILTON-TAFT
funds
Wynne in Dallas, Texas, FIRST ROSENEERG
NOTE.
I
P~NTIFFS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR
~ORARY
of
Temporary Injunct.ion against: MAXPHARMA utilizing
HAMILTON-TAFT
. the
COSTELLO
by
in HAMILTON-TAFT due to the
obt.ained a
the
t.hrea t.s
t.o
AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 16
for This
transact:ion
was
ef fect:ua t:ed
i n t. ere s t. s
eli e n t.
destruction af
af
in order
to
(a)
HAM I L TON - TAF Tan d
HAMILTON-TAFT
business
protect:
t.he
a. v 0 i d
the
(b )
as a
result of being
involved in a bankrupt.cy. b.
The
attorneys
funds
for
transac~ion
by
obtained
were
ROBERTS, '..,lhereby
then
Gardere
used
ROSENBERG
to
an escr=""
fund
afforded
as
Wynne,
&
ROBERTS
an
09por'tunity to "buy back" the HAM!LTON-TAFT st:ock; c.
On
from
aut:horicy and
any of
t:.Jrn,
without.
inco
less
a
whereby COSTELLO c.aused
t=ansac~':'on
r.he
1989, MA.XPH.A.R..~
t.he
encered
ROBERTS
all c f
la,
February
shares of
ROBERTS
forgave Thus,
b:..~'wf.ILTC~-TA.FT.
·.... L::haut.
knowledge
p~blicl.y
held
P-A..'"!!LTON-TAFT
HAMILTON-TAfT
as co
MAXPHA.Rl-f..A,
the a
shareholders, than
:.he
MAXPHARl'.A
to ROBERTS and,
t.o
:~is
of
S
to
~ength
t=ansfer
MAXPP...AR1"..A
in to
transac:.::::n,
dnd
cr
the
shareholders
i-:.self
:"ad divested
ef:ect.::,ely,
or
COSTELLO
r.o ROBERTS and then,
cesul:. ot c£
arm'
~..AXPHARM.A
indebtedness
any
notice
of
had no assecs as
of february la, 1989.
]2.
On
february
ROBER.TS,
as
of
represent.acives additional
14,
February of
1989, l~,
AR-""..5TRONG
1989,
HAMILTON-TAFT
:-.ad
furt:her
di.=ecr.ed
to .ire
learned
ins~ructed
and
transfer
t.hat
t.o
HADIO
an
52 million for purposes as yet unknown but ~resumably
to either fur~her assist HAOIO in projec~s in which he is engaged J
PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR Te.."IPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TF.MPORARY AND PER.HANENT IN.nmCTIOH, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TROST
Page 17
con~idera~ian
and in
by
giving
ROBERTS
alter:1at.ively, order 5
to
As
and
t.o
of
HAMILTON-TAFT
g i ve n
has
wire
be
s1:ock
ins 'C ru c to ion s
transferred
ext.ent.
preserve as
ac~s
in
for
or,
held
as
an 0 t. her
accordance
that.
at.
and
leas~
ROBERTS
prot.ect:
whom
the
~PH.A.R...\f.A
t.he
ongoing
fl..AM.ILTON-TAFT,
with
int.erest.s
to
0
f
continued ~nd,
1989;
acquired the
needs to be imposed in
HAMILTON-TAFT prior
had
wrong full y
t=us~
the
loot.ing
February .10,
has
a const.ruct.ive
to
of
reveal,
asset.,
t.hrough
ent.ity,
asset.
f
primary
it.s
1988,
. shareholders pC:":1ary
release
out.lined
the
~~I~TON-TAFT
t.o
to
the
Janua"ry,
order
in other transactions;
to be given on February 15 or February 16, 1989.
inst:.=~ct.ions
fur~her I
a
ROB ERT 5
I
Sl,OSO,oao.oo
from
to ROBERTS
for a "st:.rawman" transfer of funds to ROSENBERG in
e c ~ r i t Y ian d
1'4..AXPHAR..."iA
support.
financial
effect.uace
3J .
reciproca~e
for which RADIO will
its
of
~.AXPH.A.RM.A
t.he
asset.
had
wrongful
been
the
t.ransfer
t.o
Rca::R~S.
DETA1UD FACTUAL BACXGROUND
ACQUISITION OF MAXPHARMA AND RAKILTON-TAFT
J4. and
is
HAMILTON-TAFT in
the
business
payment and filing of clients
of
egu-ivalent
was of
the
providing
employmen~
HAMILTON-TAfT t.o
incorporated
tax
pay
Cali fornia
1979
required
as
swns of
of
money
respect.ive
, PLAJNTIFFS' ORIGINAL PETITION, APPLICATION POR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERM.AHENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
for
In t.his capacity,
HAMILTON-TAFT
withholdings
in
tax comput.ing services re~urns.
tax to
in
Page 18
payroll
periods,
accoun~s
(~RAMILTON-TAET
with
the
which
agreements
HA."iILTON-TAFT
sums
HAMILTON-TAfT
CONCENTRATION ACCOUNTS·).
and
HAMILTON-TAFT
between
then
holds
CONCENTRATION
from
ACCOUNTS
i-cs
time
the
in
In accordance clients,
invest t.he monies contained
entitled to
is
HA.'iILTON-TAfT
said
in the
af
receipt
until the time of payment and have the use of the interest earned thereon
(with various variations of such
HA.'iILTON-TAFT
H..A.MILTON-TA.fT
existing with
Prior to the acquisition of HAMILTON-TAfT by
different clients). MAXPHAR..'1.A,
ag=eemen~
had
CONCENTRATION
only
invest.ed
in
ACCOUNTS
secure
from
monies
the such
invest:.ment.s
as tonds or treasury notes. Pr ior
3S.
c~ncer.t.=3ce
:cs
1986,
busi:less
a
H.A..'1ILTON-TAfT
wholly-owned
without:
MAXP:!A.R.'iA,
of
and as a resul7. af subscant.ial
port:folio
in
of
relar.ed
losses co
maC~2rs
ent:l':.':'es,
During early
HAMILTON-7AfT
C!GNA
CIGNA dec iced
ir.surance-relaced
HAMILTON-TAfT.
limitat.ion
purchasers
by
affilia.te
co sell any non-insurance
accordingly,
praspeccive
by
of
the proper't.y and casual r.y area,
in
including
purc~ase
o..,ned
During
ex;:e!' :enced
and,
t.he
was
HA..~ILTaN-TAfT
Car;oracian.
to
included,
1987,
without
limitation, ADF Corporation and Concrol Dat.a Corporacion. 36. Ms.
As a mat.ter of coincidence,
Fran
Bar'tlet:t,
("BARTLETT"), result
,
of
then
President.
on an airplane t.raveling
discussions
about.
t.he
~n ~arc~,
and (,0
CEO
1987, ROBERTS met. of
H~"!IL':'CN-TA..FT
washingt.on,
operations
of
D.C.
As a.
HAMILTON-TUT,
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR TE...\fPORARY RESTRAINING ORDER,
EX PARTE, APPLICATION
FOR TE.KPORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 19
(a)
ROBERTS
wit.h-all
of
known
HA."iILTON-TAFT
sr.eps
and
(c)
necessary
to
that:.
acquire
VISION,
ROBERTS
HAMILTON-TAFT
~OBERTS
which
had
claimed
the
where-
through to
a
cant:rol,
37.
to
in
the
same
ROBERTS
would
presen~
a
manner
as
had
previously been
immediacely begin to under1:a.ke
proposal
HA."iILTON-TAFT for
to
the
by VISION or some other entity cancralled by ROBERTS.
acqu~si~ion
Between March I
disc~ssions
1987
I
and ,july f
1987,
ROBERTS conducced
with CIGNA regarding the Fassibility of the purchase
~~~ILTCN-TAFT.
38.
In
July
canf~dent.iality ir.f:::~at.ion 1~8~, ··~.c
as
BARTLETT
that ROBERTS would be inl:eresced ~n cancinuing the operations
perfor:ned,
of
interest:
and
corpcration (b)
t.o
indicated
of
agreement
concerning
CIGNA,
.:5nopping
1987,
wit.h
and
C:GNA
HAMILTON-TAFT.
K&~ILTON-TAFTJ agreemen~"
VIsro~
and HT
ROBERTS
executed
acquire
in
order
to
On or
a.bout.
December
inc.,
~oldings,
a
en~e=ed
in~~
2, d
so chat CIGUA would r.ot: salic:t HA-'iILTON-
HT Holdings, Inc., was a wholly awned subsidiary of VISION whic~
had been
was a~
to purchase
~~rLTON-TAFT.
Between approximat:.ely August,
39. ROEER.TS
fo~ed
repeated
made
~repared
:east
to c lose
four
~hereafter
(4)
representations the acquis i t':"::n
occasicns
negated due
1987
to
the
closir.g
and December,
f
that, 0
f
inabili~y
through VISION,
he
and,
on
HA.'1ILTON-TA.fT;
ca~es
1987,
were
set
of ROBERTS
only
to be
to close t.he
~ransact.ion.
,
PLAINTIFPS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TEMPORARY AND PERXANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 20
Neither ROBERTS nor VISION were involved in any fashion
40. with
MAXPHARHA
t.hrough
late
from
1987,
the at
of
first: contact:
time
discussions
time
which
with
BARTLETT MAXPHAR...IoiA
with
init.iated. 41.
During the period of approximat.ely July 1
lat.e December,
through
ar:cempcinq t.o locat.e sources of
ROBERTS was
which would be available co ena.ble him
financing the
1987,
1987 I
acqu is it. io not HAMILTON -TAFT.
ROBERTS
to
did
effect.uate
not
have
an
indegendent financial base upon which to close such a cransact:ion.
42.
ROBERTS
vehicle
through
effectuat.ed. ir.cc~orat.ed
~XPHAR~
locat.ed
which
acquisit.ion is
MAXPHARMA
a
as
of
a
pot.ent.ial
HAMILTON-TAFT
publicly
in t.he State af Tennessee,
awned
corporate could
be
corporat.ion
the shares of which were
being traded an the American Stock Exchange .
Through a proces s
..\ 3 .
E=rec isely unknown,
ROBERTS
t.o c=nducr. negotiat.ions for the acquisit.icn for corporat.e
in
~he
en~i ty
through
which
~'"!ILTON-TA..FT
proceeded
~~p~~
as
t~e
would be a.cquired
following respect.s: a.
Bet,\oreen July,
manner present.ly unknown, wit.h RADIO,
1987,
a.nd
December,
1988,
and in a
ROBERTS est.ablished a relar.ionship
a Saudi na~ional of purpor~ed subst.ant.ial wealch
addit.ionally, supposedly had banking connecr.ions wit.h a
who,
,
National Bank of
Washing~an;
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR n:KPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
~ORARY
Page 21
b.
concrolling
A
block
of
st:.ock
in MAXPHA.RMA was
owned by PRASAD and, on informacion and belief, PRASAD had a substant~al
Bank
of
said
loan
loan guaranteed by T.
Washingt:.on,
funding
believed
for
c.
where
the
to
a
int:.errelatianship
learned
t.hat
t.he
by
PRASAD
and
influence,
const:.ituting
his
of
incerest:.
in
Sank of Washington,
financial
difficulcy
in
personal
or t.hrough
and HADIO,
PRASAD
Nat.ional '''''as
PRASAD
significant
resulc of sheer coincidence,
between
link at.
had
associated ·Jit.h
acquisicion
Eit.her: as
f~nancial
be
HADID
Bert Lance at the National
t.he
ROBERTS
with
t.he
wi t.h
the
loan of PRASAD at. t.he' National Bank of Washingt.on; d.
ROBERTS
pr:Jposit.ian ::r
ROBERTS
t.hrouc;h
ar.d
l::y
that.
and/ or
approached
HADID
and/or KADID,
PRASAD
either
individually
ccncrolled or aff.:.l':'ated ent.icies,
acquire a controlling interest in
utilize !'!.A.XPHARl-'.A as
~~p~~~
would
and, t.hereaft.er,
t.he corporat:.e ent.i.ty which would then
acquire HAMILTON-TAFT; e.
The
ROBERTS
by
~XPHARM.A
ex~ension
Bank
of
considera~ion con~ernplaced
and/or
included
HADID
che
of fact:.
would be neqociat.ed Washingt:on,
(ii)
the
chat. for
ROBERTS
for the acquisicion
int.erest:
PRASAD
favorable
(i)
PRASAD and
of
wi~h
~he
HADID would
t.erms
of
National provide
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMFOSITION OF CONSTRUCTIVE TRUST
in
Page 22
quaran~ies
personal
on the loan of PRASAD with Lhe National
Sank of Washing~on, (iii} approximately
S3
HAOlD would be provided a
million
from
asset:s
the
af
loan of
HAMILTON-TAFT,
once it had been acquired, which said funds HAOlD would t:hen projec~ in
utilize with respect to a convention involved
Aspen,Colorado,
in
and
would receive 750,000 shares of -i4.
In
cont.ents
the
wit.h
accordanc'e
of
a
Schedule
of
on Decemcer
VISION
ROBERTS
and
HADID
Nat.ian'll
Bank of
20,
0
1987,
execut.ed
:NC.
as
t.he
evidenced
Securities
in
November and December
personal guarancies
a
int:eresc.
~allas
t:hrough
~...AXPHAR?-f.A
from PRASAD of )3.3% or che cammon Sl:ock of
Officer below',
over
and
of
t.he assignment.,
President.
ROBERTS,
~PH.ARJof.A
of
t.h:-ough dnd
·..:sed
of
PRASAD
MAXPHARMA.
his
was
t.he
as
t.he by
an
Chief
Execut.ive
asser~ed
':':ls'trumenc
a.n
MAXP~~.
discussed more
(As
concrol of 'I!SION
~..A.XP[-l...a..R.."'tA
to
Couney, Texas,
a.ssig~enc
time
a.nd
Delaware corporat.ion wit.h
t.he
the
by
1987,
of PRASAD and ROBERTS,
favor
acq'Ji=ed
At.
HADIO
MAXPHARl-f.A by ROBERTS on behalf
("VISION"),
con:=::lling
and
wic~
filed
princi9al place cf business in Dallas,
i~~
and/or
~~P~~.
the i:-
Washingt.on in
and t.hrough VISION,
f
ROBERTS
foregoing,
t.he 13-0
Exchange Commiss ion en behal f
(iv)
which he was
or
fully
cont:rol cool
to
acquire HAMILTON-TAFT. 1 45.
Once
cont.rolling
its
, rl9ht .
ROBERTS/
int.erest.
chraugh
in MAXPHA.RMA,
VISION, VISION
had
assigned
acquired co
MAXPH.AR.MA
to purchase KAMILTON-TAFT.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR ~ORARY
RESTRAINING ORDER, EX PARTE, APPLICATION
POR TEMPORARY AND PERMANENT
INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
t.he
Page 23
According
46.
t.o - BARTLETT par~
ai=plane during the early
the
was
locate C'H,
president:
for
source of
a
agreement
with
sold
af a was
COSTELLO
the
regarding
COSTELLO
obedience
the
1987.
assist
its
was
him in
parent:.
whereby
att:empt:ing
ROBERTS
t.o
the purchase of reached
ROBERTS
Chai~anl
the
COSTELLO, who
would
arrange
president.
a.nd
an for
CEO
af
and 'Chairman of ~~ILTON-TAFTJ plus the payment:
INC.,
the quid pro quo consideration for which
$1 million bonus, (a)
to
by
ccsr:::!..LO to be inves'tsd as ~P~JULU~,
of December,
Trucking Company,
C&H
financing
being
which was
and COSTELLO met. on an
ROBERTS
J
effectuating
~PHARl-'..A
af
opera tions
the
COSTELLO -ith
of
desires
of
ROBERTS
and HAMILTON-TAFT and
acquisition
by
MAXPHARl-C..A
=epresentat.ives
of
H.A..."1ILTON-TAFT
the
of
(b) C&H
Trucking Company. "'7.
in Cecember, by
=.nd
-/ehi.cle
1987,
:.hrough
Jdnuar/, TAr'!'
a
fer the
VISION,
through
p~!L:aN-TAFT
48.
advised
RCEERTS
which
:0 to
time of -=.he intent. of
ut.ilize
:-!AXPHAR."'..A
effec-cuat.e
t.he
as
the
ROBERTS, corpordt.e
acquisit.ion
of
the
stock.
Furthermore,
1988,
firs~
late
ROBERTS
financial
lat.e for
funding
'the
in
December,
first:
st.ruct.ure
1987,
early
or
in
time proposed 'to HAMILTONorchest.rat.ed
by
COSTELLO
whereby a "reverse repo" lending 'transaction would be structured, said "reverse repo~ being cons'tit.ut.ed essent.ially as follows: I
P~NTIPPS' ORIGINAL PETITION, APPLICATION FOR TeKl?ORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TI2!FORARY AND peRMANENT INJUNCTION, AHD APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 24
a. TAFT
CONCENTRATION
Weil
Labouisse
in cash
ACCOUNT
was
t:aken
treasury
Invest;nent
million
S4.1
aggregate
in cash
no t e
MAX PHARMA
of
b.
5S
million
whic~
of
about December 30,
29,
an
t=ansac~~on opera~ing
MAXPP~
by
in considerat.ion
CIGNA.
to
treasury
owned
by
CONC~NTRATION
Thus,
bills
the
in
t.he
HAMILTON-TAFT
and
ACCOUNT FUNDS;
and,
ftras
transac~icn
the
5900,000.00
to
be
paid on or Co
be
en or about January was
ultimately, drawn down by
funded
by
t.he
~p~~~ agains~
expenses.
On or about January 29, agreemen~
HAMILTON-TAfT.
The
required several hours funds.
paid
5500,000.00
additional
stock purchase
of
Security, 'Inc.,
1987, and 53.6 million of which was
the closing of
1588,
49.
Howard
Although the tocal' purchase price was stated to be
million,
paid ac
be
sec ured
wa 5
amount
to
purchased with HAMILTON-TAFT
54.1
HAMILTON-
to be held as security for repayment. of a
note
promissory note to be executed by for
the
and depos i t:ed wi th
FUNDS
Friedriche
from
WElL-), with which funds HOWARD WEIL then obtained
(~HoWARD
a.
million
SS
Upon
1988,
~PH.ARl'f.A
entered into a
with the affiliate of CIGNA to purchase .. reverse
entire
r-epo ,.
loan
trans act.ion
to consummate wi~h respec~ to the exchange
conclusion
l
however,
ROBERTS,
by
and
through
, PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERM.ANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 25
conc=olled encities and individuals, including without limitatic COST::LLQ,
effectively purchased
had
acquired control
and
0
HAMILTON-TAFT with the assets and funds of HAMILTON-TAfT. 50.
While
rela tive
some
significance
conc~~sion
known
MAX?~~
the
transaction
respect
51;~~:~=ant
as
of
acquisition
of
debt.
to
conswnrnar.e
a
negacively
~
that:
t.he
the
and the
deemed
to
thac
(b)
ttle
fact
forgiveness
by
to INTERPHARM,
occur as
MAXPHARHA
from the
con~racted
said
had
a
i~ability
transacl:.ion
impacted
upon
the
financial
the outline of transac~ions with respect
follows: In
March
of
of
the
PRASAD
was
(SO\)
sale,
af
extent co which the forgiveness of
indebtedness
a.
ext.ent
~~PHARHA
pre\riously
t.he
operations of MAXPHARMA,
is
in
INTERP~~ deriva~ive
(ii)
-
r:esulted
evidences
(i)
liability to
which is as
the
HAMILTON-TAFT
significance
!NTERPHARM and
the
transact:ion~
the
(a) coincided at or about the time
wit:'1
percent:
t.o
INTERPHARM,
transac~:on
which
to
:'_.l.X?'f-l'.AR1"..A
t~
in
between MAXPHARMA and a
Sl,231,500.00 in loans from
of
forq:'/'eness
of
a
INTERPHAR.."i transact.ion
the
wit.h
involved
under the new control of ROBERTS was attempting
:-!AXPHA.RMA,
that.
is
of said
conclude
t.o
directly
the acquisit.ion by MAXPHARMA of HAMILTON-TAFT,
t.o
corporation
when
not
Pres ident: and CEO.
1987
J
~XPHARH.A
purchased
stock in INTERPHA.RH. INTERPH.A.R.M S
Likewise,
I
At
controlling
eight.y
the time
0
f
shareholder I
PRASAD was also the President
J
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TYMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR T~ORARY AND PER.MANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 26
af
MAXPH.AR..~.
ag-reement,
MAXPHARl".A
and
CEO
issued
common
In
acc:Jrdance wit.h
exchanged
st.ock of
the
487,951
the
acquisit:ic
of
shares
company on March
31,
eight.y percent. (BO\) ownership of INT!RPHARM.
newl:
1987,
fOt
An additional
521,227 shares of MAXPP~'S common s~ock .as issued on or about. July 15, 1987, for no additional consideration. b. d
INTERPHAR.."l: incurred
sign if ic ant . drain
Oc t. 0 be r
of
of
sale
all
144
?R.ASAO ~,
to
agreed
of
INTERPHARM st.ock
agreed
t.o
surrender back
shares
of
wit.h
the
c:Jnnec:.i..on
::eleased
it.s
stock
original
INTERFHARM
from
available an
cash.
In
agreement.
for
t.he
Pursuant.
to
t.he
PRASAD.
shares
009,178
also
back
execu t.ed
~PH.AJUof.A
agreement.,
losses and proved to be
MAXPHARMA' S
~.AXPHARMA
1987,
INTERPHAR..'i
rescission
on
large
ret.urn
to
t.o
PRASAD
o'WTled by MAXPHA.R.."fA, to
~PHAR.MA
that.
PRASAD
t.ransac:.':'on. repayment.
of
all
of
received The
and t.he in
agreement:
51,231,500
in
:oans f=cm MAXPHARMA plus accryed interest..
c. or
Closing under the rescission
about.
February
8,
1988.
HO\olever,
deliver 100,000 shares of MAXPHARMA'S ?ledged as
agreemen~
occurred on
PRASAD
s~ock,
failed
which had been
to American National Bank of Jacksonville,
security
for
cer":ain
personal
to
indebt.edness
of
Florida, PRASAD.
Based upon information and belief, PRASAD has still not. made ,. delivery of the 100 1 000 shares of stock to MAXPHARKA.
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEXPORARY AND PERKAlfENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTROCTlVE TROST
Page 27
~
0 uri n q
51.
1 9 8 8,
HL'i I LTON - TA.F T
approximately $14,510,581.00,
pro v ide d
net
fun d oS
0
f
constituting loans or transfers of
to or for the benefit of individuals or entities con~rolled
funds by or
affiliated with
fallowing (dates and
a.
transac~ions
1/31/88:
HA..~!LTON-TAfT
pu=c~ase
including without
ROBERTS,
$5
were
being approximate):
million
actually
HAMILTON-TAFT.
limitation the
to
HOWARD-WElL.
used
In this
to
enable
Funds of
l"f..A.XP~.A
to
$5 million of
transaction,
cash was taken from the HAMILTON-TAFT client tax truSt funds and
used
to
purchase securities which were
na.me of
HAMILTCN-TAFT
pledged
by COSTELLO act:ing
HA~ILTON-TAFT,
in
the
in
on informacion and belief,
and,
the
for
issued
were
his capac i ty as Cha irman of
benefit
of
MAXFH.AR-'iA
and
held
or
pledged by HOWARD-WElL as
security for a loan to
54.1
paid to CIGNA for the purchase by
~illion
~~X?~ARM.A
5900 :~r
I
of which
from
~as
CIG~lA
of
000.00 of which wa.s
HAMILTON-TAFT.
The
HAMILTON-TAFT,
and
~~PHARMA,
t:.he
=emaining
to be ut:ilized as working capit.al remaining
S900,OOO.OO was,
dissipated at. the cont.roi and direction of ROBERTS
in fact,
for the
benefit of ent:ities or affiliat.es cont.rolled by ROBERTS, and no~
for working capital.
b.
2/26/88:
$1 million to HAXPHARMA.
J
PLAINTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR ITKPORARY AND PERM.ANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 28
3/8/88:
d.
3/11/88: $2 million to Hadid Development Co ..
e.
3/23/88: 5815,000.00 to CHRISTIANA, INC.
f .
4/21/88:
Corooration. payment.
to
ro
International
provided
as
part: a f
million
52
funds
were
acquisit.ion of
Hadid Development Co.
which
of
C&H
COSTELLO
Nat:.ionwide,
been
had
r.he
a down Inc"
ROBERTS could noe arrange
far
a
former
The r.ransact.ian cculd not. close due to che
fac~
financing suff':"::ien'C
to
tract of real estat.e associated wit.h the sale of
pay far a
the
t.he
company
president..
thar.
These
Ear
t.=ucking
$1 million
~o
c.
trucking
::rlnci~al
and
company. interest:
51,500,000.00
Approximately has
been
repaid,
t.he
with
in
present:.
talance on this loan being 5662,000.00. g.
5/88-10/88:
$1
million
in
manaaement.
During
t.he
referenced
period
:ni 11 ion
was
trans ferred
from the accounts
MAXPHARMA
":0
~anagement.
for
the
of
purpor't.ed
time,
fees.
approximat.ely 0
purpose
HAMILTON-TAfT
f
of
sat.isfying
fees and related pur;ort.ed expenses.
J
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR ~~ORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.KPORARY AND PER.M.AHENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TROST
51
Page 29
h.
to
_11/88-12/88:
amount.s
were
ACCOUNT
FUNDS
o~era~ing
52. 51,
for
M.AXPRARMA
The
sup ra,
operating
trans fer=ed
to
expenses.
frcm
l-f..A.XPHARMA
the
fallowing
The
CONCENTRATION
HAMILTON-TAFT
for
'transfers
representing
purpose
of
~PH.A,R1o(.A
expenses: i. 11/9 - 535,000.00; ii.
11/16 - S22,000.00;
iii.
11/21 - 5228,000.00;
iVa
i2/2
Si2,OOO.ao;
v.
12/22 -
57~,OOO.OO;
vi.
12/28
510,000.00.
fund
transfers
all
were
~ILTON-TAFT
$411,000.00
referenced
uns ec ured
fund
numerical
in
t ra ns f ers
paragraph
made
from
the
CONCENTRATION ACCOUNT FUNDS.
LAWSUITS On September
53.
tr.e
:"34t.h
District
··~_UPH.A.R...~/ROBERTS
CORPORAT ION, pe~~~nent
Court,
~FH.AR.."!.A,
Da.llas
A.
HADID,
and
Dallas,
INC.,
JOHN
brought
INC.
County,
against VISION,
SUIT")
MOHaMED
H.
suit
Texas
in
(t.he
CHRISTIANA ENERGY ROBERTS,
JR.
In
part the pleadings allege t.he following mat.t.ers:
That
d.
1988,
13,
common
HADlO scock
con~rolling
and
ROBERTS,
of
~..AXPH.AR.'!A
in~eresc
t.hrough
VISION,
sufficient
to
give
acquired chern
therein;
J
PLAINTTFFS' ORIGINAL PETITION, APPLICATION POR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMAlfENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 30
a
b.
'lISrON
That.
positions
and
and
ROBERTS
caused
their
exercised
to
l-I..AXPHARMA
loan
cont.rol
to
VISION
5625,000.00 as evidenced by two promissory no~es in the
amount
af
SlOO,OOO.OO
and
5525,000.00,
each
of which
nor.es has come due and is currently in default;
VISION, HADID, and ROBERTS exercised their
T~a~
c.
to
HAMILTON-TAF'!.',
cause
subsidiary·- of
ev idenced
MAXPHA.R.MA,
HA...\'{ILTON-TAFT,
which
loan
:0
promissory
a
by
noee
then
the
wholly-owned 53,000,000.00
HADID
given
not:e
has
come
con~rol
from
HAOID
and
due
is
to
in
default; Tha t.
:i.
and
ROBERTS
VIS ION
caused
HMIILTON-TAF'!'
5875,000.00 to CHRISTIANA ENERGY CORPORATION,
c::nr.ralled ncc.a
by
from
::ehalf
of
CHRISr:ANA
CHRISTIANA
which not:.e
Chair:nan,
as
ROBERTS,
evidenced
E~lERGY
ENERGY
has
by
a
come due
and
by
is
loan
a company promissory
CORPOR..~TION
CORPORATION
to
signed
on
ROBERTS
as
current:.ly in
default.;
a.
Tha t
ROBERTS
d u -c y
not
~
corporation loo~ing
the
and VIS ION
had
breached
pro fit
dis pro po r t: ion ate 1 y
a or
i~s
assets
subsidiaries, of
t.heir
by
l"..AXPHARMA a.nd
it.s
: iduc iary f ra m
systemat:ically subsidiaries,
I
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TF..MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.MA.NENT INJUNCTION, AND
APPLICATION
POR
IMPOSITION OF CONSTRUCTIVE TROST
the
Page 31
said
loot:ing
having
consisted
:Jf
the
borrowing of
asser~s the
corporate assets which MAXPKkRMA
Defendants
cherein never intended to repay; f.
That:
the
funds
been
used
by
the
personal gain,
a
so;.
Ja.nuary. 15,
ROBERTS,
:1.
CiolO
COSTELLO
Direct.ars, agreement.
bet.ween
acq~i.si.:'i.on
of
::-::>71
cwne=snip t.hereof.
at
certain
ROEERTS' woe:-e
not.
par~
in
1
for
t.heir
had own
execu t.i ve
and
a.nd
VISION,
ROBERTS
filed
~XPHARz.-..A/ROBERTS
af
members
LITCHFIELD, ROBERTS
COSTELLO,
INC.,
a
t:hrcugh t:he Affidavits on file of
t.he
~PKkRMA
seeking
and
SUIT I
S
against Board of
rescissicn of regarding
l-f..AXPHARl-f..A
and
L:LTCHFIELD
to
act.s relat.ing to P..AHILTON-TA.FT dnd
an the
relief
resr.rain
~~PKkRMA's
The councerclaim alleges, among ocher things:
That alt.hough
R08ERTS
ar.d
therein
therein
HA.."ULTON-TAFT by l-f..AXPHA.R-"!A and injunctive
ce!."~ain
a.
Defendants
for payment of a Jaguar car and
1989,
VISION,
~.AXPHAR.MA,.
aga':':"iS:' ~~em
JR.
and t.he
MA..X?::_~=t."La..
the
Defendants
such as
ccunt:e==laim susta.ined in JOHN
to
home for ROBERTS.
~ersonal
an
loaned
opt.ions
to
specified
acquire 475, 000 shares of prices
right to purchase awarded
their
had agreed to award VISION
MAXP~~
in
exchange
Kk~ILTON-TAFT,
opt.:'ons
as
for
~..AXPHA.RMA
VISION
and
VISION and ROBERTS
allegedly
agreed
to
J
PETITION, APPLICATION FOR ORDER, EX PARTE, APPLICATION FOR TE..."{PORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST P~NTIFPS' ORIGINAL RES~NING
TEMPORARY
Page 32
by
Tha~ COSTELLO,
b.
~AXPHARMA,
HAMILTON-TArT
t:o
abligacions,
and
result:
0
f
which
been
have
may
and ocher officers and direc~ors of
MAXPHARMA
operating
expenses
HAMILTON-TAFT' s
of
pay cenain debts,
to
order
in
ou~
funds
"upscreaming"
of
MAXPHAR.'"!A,
st:ock may have
been
as
a
in an
immediace danger of loss and/or diminution in value; Tha~
c. and
cirec~ors
t.o
obt.ain
MAXP~~
of
MAXP~~
and/or and
Associ-acion
P..A.'iILTON-TMT,
risk of
value
the
and
it.s
:'ndirec~ly
=unds,
G:lY
f ram
in
loan
HAMILTON-TAFT
and
stock,
to
st:ock
fr::m
from
pledging
a.
hearing
a
direc'=ly
and
t.rans ferring
or
grant:.ing
securi ty on
of
~p~~,
H.AMILTON-TAFT,
any third-part:y a pending
pose
consequence
or acherJise
I
co
of
and diminution
a
di.=ec~ors,
ocher..,tise,
or
asser-ced
as
Savings stock
cest:raining
Order
acqui=ing
ac~emp~ing
the
injury,
harm,
transferring,
grant
were
officers
Caprock
pledge
co
act:ions
Rest.~aining
office!:'s
by
from
loan
at::.empt
suc:J.
obcaining,
to
a
subst.ant:ial
as signing
a ~-:ernpt:ing
were in che process of
HAMILTON-TAFT's
which a Temporary I~IC.
an
which
pot.ent:ial
co
fund
in
o~her
and COSTELLO, and/or
the
and
or
int:erest: Temporary
rnjunct:ion. 54' . Ear
a
On J anua.ry 19,
Temporary
1989,
Injunct:ion by
with t.he Counterclaim filed,
a hear ing was he ld on the reques t: VISION
and
ROBERTS
in connec~ion
at. the conclusion of which the Court:
J
ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION P~NTIPFS'
POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 33
ent.ered
an
Ord-er
that.
request:
the
of
VISION
and
Temporary Injunct:ion be grant:ed and chat MAXPHARMA, and
be
direct.ors
indirect.ly funds
rest:rained
obtaining,
by
loan
assigning,
or
acquiring,
55.
On
24,
199th judicial District Court:,
COST::LLO,
ROBERTS,
LI'r'CHFIELD,
shareholders of MAXPH.A.RMA, INC.
and
joined
~PH.A.RMA,
INC.
as
par~y
Defendants
~u=:::~aser
ac:.ion
the ac~s
as
:0= co
and
from
in or on
the
individually and brought: suit in
Collin Count:y, bot.h
HADIO,
Texas,
indiVidually
against: and
as
INC.,
HA."!ILTON-TAFT,
INC.
and
VISION,
INC.,
HAMILTON-TAFT,
INC.
and
VISION,
(t:he
considerat:ion of enjoin
and
any
on t:he merits.
("~ONTAGUE -),
INC.
or
tran:sferrinq
Patt.i Mont.ague,
1989,
direct:ly
HAMILTON-TAFT
t=~al
for
its officers
from
or any ocher enc'.lmbrance
as a shareholder of MAXPHAFJ-f.A,
t.he
from
st:ock pending a final January
enjoined
or ot:herJise
ot.herwise,
t=ansferring,
~~ILTON-TAFT
and
ROBERTS
"~ONTAGUE
the
rest.rain
SUIT-).
!'!ONTAGUE,
shares of ARMSTRONG, the
Defendanr.s
from
brought. cert:ain
related t:o MAXPHARMA's ownership of HAMILTON-TAFT & COMPANY,
a wholly-owned subsidiary of MAXPHA.R.MA,
alleging in
~aterial
respect:
a.
That
delivered nOLe
in
t:a
r.he
( .. ROSENBERG ,. NOTE,
in
July,
Sta.nley
D.
original NOTE")
~XPHARHA
and
1988,
MAXPHARMA
Rosenberg princ:'pal in
executed
order
and
its
original
amount: r.o
execuced
of
secure
delivered
to
promissory
$615,,000.00, the
ROSENBERG
ROSESB£RG
, P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION
TEMPORARY RESTRAINING ORDER,
FOR nKPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 34
a
security stock
int:eresT:.
of
lien
all
upon
well
as
HAMILTON-TA.FT,
HAMILTON-TAFT
shares
the
as
of
Common of
possession
the
s~ock;
Tha c
b.
and
the
and as a resulc,
ROSENBE RG
NOT:: was
currencly in
de faul t
the HAMILTON-TAFT stock may' be in Lmmedia~e
danger of loss and/or diminucion in valuej c.
That.
MAXPHARMA
··ups treaming"
order
funds
pay
to
and
out:
of
cercain
HAMILTON-TAFT
debe
poceneially
were
CaSTELLO
to
obligat.ions
MAXPH.A.RMA
and
in
operating
expenses; d.
Tha t:
M.A.XPHAR.."!A
or directors of
to and
obt:ain or were
e.
MAXP~~
fund
a.
loan
potent:ially
r~~ILTON-TAFT
in
That
injunccion
and COSTELLO and/or other off ieers
from Caprock Savings
attempting
connec~ion wi~~
c~nduct:
such
enjoining
the
ac~empt:inq
were in ehe process of
t.o
pledge
Associacion
the
stock
of
said loan;
warranted
Defendanes
imposition
from
of
an
aetempt:.ing
to
?ledge the HAMILTON-TAFT stock. 57 . grant-ed ROBERTS
On January 24 ,
in
the
filed
a
MONTAGUE
Plea
19 B9,
same
as
the
However,
SUIT.
in Abaeement
asserted by VISION and ROBERTS the
a Temporary Res training Order was
on January
st.dt.ing that.
in ehe
26
I
1989,
the counterclaim
~.AXPHA.R.MA/R08ERTS
SUIT was
claim assert.ed and t:he relief requested
in the
, PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RES~NING ORDER, ~X PARTE, APPLICATION FOR nMPORARY AND PER.MANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OP CONSTRUCTIVE TRUST
Page 35
pending MONTAGUE SUIT and that I
Dallas
Count.y
Court
had
dominant.
acquired
Collin County case should be abat.ed. in Abat.emenr. was
foregoing I
the
jurisdict.ion and
the
virtue of
by
the
ROBERTS a.nd VISION'S Plea
granted on or about January 27
1989,
I
and the
Collin County case was ordered to be consolida~ed with the Dallas
Couney case. DIveSTMENT OF HAMILTON-TAn STOCX
TO CR ACQOISITIONS, INC. 58.
CR
ACQUISITIONS was
sec retary for ROBERTS)
(the
aTTELL
Agent for service of process, ad dr e s s
2 a0
af
~o
lisced wit.h resgect: On
or
=.:. <; h t. s
T A.fT
prey ious 1 y
Ac~~isit.ions,
60. (20\)
BELL is
of
furt:.her
CR
10,
~resent.ly
2,
owned
of
has a registered Te x a s
7' 5 2 Q 1
by
Q59
I
1989,
in
a
f'..llly i<nown,
a0 0
s hare S
~XPHARMA
0
-ere
f
transact.ion
the
t.he ceri:ificat:.es
s t. 0 c kin P...AM I LTO N-
t.ra.ns f erred
t.o
transac~ion
CR
in a
unknown. co own approximately twent.y percent
understood
A.CQUISITIONS,
informacion
.l ry S u bSl" d'a
by
the Reg ist.ered
Da 11as,
wit.h VISION being involved in the
presen~ly
respect
Sui t e l 3 7 5 I
February
!: he
cf
c~~pany
1988,
this corporat.ion.
about.
t. her e t. 0
also
is
9I
No officers or directors are presently
details of ·.... h:cn are not. ar
who
I
and which
ere see n t:. Co u r~ I
(the address of ROBERTS).
59.
incorporated November
and
E·Jl"ng ....
plus
celief
01"1 ,
I
::::lnd g
various
BELL has
also been
options
therein.
cont.rols provl'ding
Coms-cocx,
On
a
subscantial
J
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPORARY AHD PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 36
.
~
. -. -1-----'--
..
4
financial
sypporc
ROBERTS a1 i ve ")
and
sustenance
for a period
0
co
Nkeeping
(i.e.,
ROBERTS
fat. leas T;. t.wo (2) man t:.hs prior co
February 10, 1989. On
61.
or
about.
cransaccion co be
effec~uaced
cherecofore owned by [ .. 2/10
~x(PHAR.J.!A/CR
Al though
62 .
~~ILTON-TAFT
February
MAXP~~
la,
wherein t.he
ca.used
ROBERTS
1989,
s~ock
a
of KAMILTON-TAFT
was cransfer=ed co CR ACQUISITIONS.
ACQUISITIONS HAMILTON STOCK TRANSFER"]
the' det:.ails
0
STOCK TRANSFER are
f
:.he
MAXPHAR..."'!A/CR
ACQUIS ITIONS
unknown, some of che informacion
which is known is as follows: a.
On February 10, che
ACQUISITIONS
purcha.se
price,
loan,
the
pay a
purchase
amount.
proceeds
the
of
exercise
of
9r ':'ce
S600,OOO.OO
and
const.it.ut.ing
relat.ed
which CR ACQU!SITIONS
VIS leN and an
to
2,059,000
ACQUIS ITIONS
(presumably
addit.ionally
to
execut.e
f rom
a
coses
has
of
of
t.he the
agreed
co
., exerc is e pr ice"
to
has ag:=eed t.c
ACC:UIS:L:TIONS
CR
shares
co loan CR
ROS ENBERG agreed
price
Additionally J
HA.MILTON-TA..FT.
pledge
1989,
Sl:ock
VISiON)
purchased to
by
Rosenberg,
security agreement.
in
favor
CR and
of
Rosenberg;
b.
VISION, CR ACQUISITIONS,
ROBERTS and Fran Barr:le'Ct.
who
has
been
t.he
~JL~ILTON-TAFT,
("BARTLETT-,
princi~al person
~p~~,
a California resident
managing
r:he
affairs
J
P~HTIFYS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR ttKPORARY AND PElUiA..NENT INJUNCTION, AND
APPLICATION POR IMPOSITION OF CONSTROCTlVE TRUST
Page 37
of
.---. -......-..<
4
_
...._ .
_.
HAMILTON-TAFT pursuan~ co ROBERTS
and
instructions and directions of
che
entered inca an assignment. of option
COSTELLO)
I
rights, the details of which are unknown;
c.
ac
convened
meet.ing
direct.ors'
A
time
which
of
CR
R08ERTS,
ACQUISITIONS
SELL,
and
a
was
person
ident.ified and known only as "Claire", who is believed to be a
girlfriend
( "CLAIRE")
'",,-.
other
or
'~T affairs,
-----.
direc~ors
the
were· made
acquaintance
social
charge of
in
or affairs with respect.
of
ROBERTS HAMILTON-
the previous assets
t::l
of HAMlt""l'ON-TAFT.
63.
"
""
On Februarr .14,
1989,
BART!.ETT advised A.RJof.5TRONG of the
"
following
activit.ies
·..thich
had
cccur~ed
respect
with
to
the
operations of HAMILTON-TAFT: a.
~~erations
f
of
the
person
person
·... ho
mi llion
S2
..... ho
has
cver'seeing
is
was
dir~':t.ion of
and
trans ferred
CONCENTRATION ACCOUNT to Amerimac, by RADIO.
United belief,
been
des ignated the
by
present:
~~~!LTON-TAFT;
...At----t.he inst.ruction
b. 0
ehe
as
RcaERTS
sum
is
BELt.
f.:-om
the
ROBERTS,
the
HAMILTON-TAFT
a corporation cont.rolled
KADIO is believed to be presently outside of the
Stat.es. the
It
funds
is
unknown,
transferred
but
to
on
HADID
informat.ion
and
at
are
Ameri.mac
intended for transfer to some other account;
PLAlNTIPPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAJNING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.KAN'£NT INJUNCTION, AHD APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page JB
c.
on
February
staff
members
Also
HAMILTON-TAFT
stat.ed
to
that on February 15, "1989,
or
14,
1989,
ROBERTS t
Fe brua ry
16,
ROBERTS or an
1989
his
further
I
designated
direct:ions
represent.ative
S 1 , a 5 0, 000 . aa to
addi t iana 1
a
be
would for
a
qi ven by
transfer of
des tination and account
presently unknown; d.
c~ncerning
the
u~on
Based
expressed
£....."pr~priety
the
f
0
the
and confr:Jnted by :.he
being made,
concern
of
BARTLETT
distributions which were insistence of ROBERTS and
3ELL that. the transfers be effect:Iated", BARTLETT resigned. 54.
TAFT r
BARTLETT
been
had
is
C:GNA,
HA~!:'":ON -TAFT,
HA..~!:::JN-TAFT ccn::~ence
at
all
one
the
wi th
and
times
acutely
company
founding persons for
more
than
of
ten
during
her
cont=ol
of
as c: Januar/, The
knowledgeable and
of
HAMILTON-
(10)
HAMIL~ON-TAFT
client:
the
maincai:led
the
febr".lary 10,1989,
years,
base
of
acc::unr.s
of
in a level of
and maintained proper accounting prccedures
trus~,
aC~..1isition
key
the
clients prior to
to
the
f
es t:abl ished
ha 5
part':'cularly,
65.
0
the time period prior to t.he ownership of
incl~ding
by
was
any
presence
restrictions of
at
HAMILTON-TAFT,
thereon
subject,
incidental
rtAMILTON-TAFT by ROBERTS
to
the
and COSTELLO
198B. nature
components
of
or
inr.eqrity with clients,
tr.e
assets
HAMILTON-TAFT business of
is
such
t.he business operations
are
that (1)
(2) efficient management and (3) computer
PLAJNTIFFS' ORIGINAL PETITION, APPLICATION FOR TE.MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.MPORARY AND PER.KA.N"ENT INJUNCTION, AND
APPLICATION POR IMPOSITION OF CONSTROCTrvE TROST
Page 39
data will
utilized
bases be
due.
to
properly account:
Thus,
standpoint are
the
principal
the
of clients,
funds
been expressed it has
for
t.ax payments
asset.s
from fa
which
monetary
as t.o which has previously
right of HAMILTON-TAFT to invest
been the
properly and utilize interest earned. 66.
One
management
f
0
agreements
the
of
the
f ir~
and
timely
pay
any
tax
H:AMILTON-TAFT
BARTLETT ·... as
under
ar~se
would pay any penalties which
of
of customer
this attest.s
funds
of
obligations
in
~xcess
f~i~~~i~g
On February 14,
development.s a.
the
had
wh~ch
by
dis t.r ibu t io ns
ROBERTS
on
management
and
re~pect
1988,
based on a
Accordingly,
billion.-
S~
February
st.aff
at
long-needed (C)
was
BARTLEr~.
as of that dat.e:
occu~=ed
the fact. that
BARTLETT
improper
fir:n
t~is
In.
BARTLEIT advised ARMSTRONG of the
1989,
Not~ithstanci~g
resignation
':aking a
of
clients.
to the proper management of KAHILTON-TAFT under the
auspices of management overseen by 67.
HAMILTON-TAFT
from the failure to properly
HAMILTON-TAFT paid a sum of S5,000.00 in pool
that
during
af 14,
to
due
funds 1989,
her refusal
as
suffering
(b)
directed
BELL
HAMILTON-TAFT
vaca tion,
true reasons far
~he
had
~hat
was
(a)
no
to by
BELL
announced
OJ
i th
attendant.
emot.ional stress, none of which was accurate:
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLID..TION INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTROCTI~ TRUST
FOR ttKPORARY AND PERMANENT
and to
SARTLE:TT was
longer
from drug problems
perform
Page 40
t.he t.o
Emp 1 oyee S
b.
0
f
HAMILTON-TAFT
are
concerned
and
fearful of the improper management of the firm which appears to be ongoing and increasing:
c.
We'lls
inst:itutions
pas t ,
the
acc~unts
t
8ARTLETT
Bank,
with which
one of
the
principal
HAMILTON-TAFT has
reported
(i )
an
ove rdra ft
financial
done business of
in
H.A.MILTON-TAFT
in the amount of 52.5 million, (ii) upon being told
BARTLETT
hat.
Fargo
wa s
1 onge r a t
no
HAMILTON-TAFT,
contacted
to inquire of the status of accounts,
independen~ly
expressing concern in that regard over the continued banking o~erations
between Wells
Fargo and HAMILTON-TAfT,
and (iii)
expressed
a
be
level
desire
to
provided
with
some
of
assurance that checks of KAMILTON-TAFT should continue to be honored.
have
advised that several HAMILTON-TAFT clients
BARTLETT has
:0.
c8ntacted
her
very
absence from the company, intent:on
to
terminate
=ecent.ly
expressing
concern over
and several clienc.s have
their
business
relations
her
indicated an
with HAMILTON-
TAFT cue to the recent change in management.
69.
The
developments
depietion of assets FUNDS
and
the
of
recent
events
with
respect
to
fram the HAMILTON-TAFT CONCENTRATION ACCOUNT
change
of
management.
have
(1)
confirmed
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TIKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.KPORARY AND PERHA.HENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 41
the
co~~ained in
allegations
SUIT
respecting
~~PHARMA/ROBERTS
the
alleged
the
past
conduct
SUIT and MONTAGUE
and
futu,re
intent
ROBERTS with respect to depletion of H.AMILTON-TAFT assets" and
of (2)
resulted in endangerment of the relations with, or termination of the relations of, six (6) major clients. 70. mi 11 ion
On
February be
to
ROBERTS
1989,
trans ferLed
ACCOUNT FUNDS to an f:~
15,
from
accoun~
the
and
caused
BELL
HAMILTON-TAFT
$1.5
CONCENTRATION
in the name of the Dallas, Texas,
law
of Petit & Martin.
TEXAS SECRETARY OF STATE RECORDS 71.
In
ccmplexit.y their
addition
and
t.o
t.he
int.eract.ion
proclivity
to
of
utilize
foregoing
facts
acti'Jity among
corporat.e
the
entities,
evidencing
the
Defendants
and
searches
of
the
data published by the Texas Secretary of State corporace records
c i 'J i
5
ion
5
officer,
how s
t. he
direct.or
Defendants
with
i~corporated
f a 1 2. 0
or
the
'"J
i ng
a f f iIi a
registered
following
t
ion s
agent)
( i . e ., of
corporations
s e rJ ice
the
which
followin<; are
eithe!'
or authorized to do business in the State of Texas: ROBERTS Standing of Cornoration
Cor:Joration Name
Affiliation
Nor~hlake
President
Active-not in g'ood standing
Presidenc/ Director
Inact.ive as of
Corporation
Robercs Interests, Inc.
1/18/88 due to non-payment 0 f franchi!e tax
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR TEKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORAAY AND PERMA.N'ENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
as
Page 42
~*o
Plus
~~O,
Inc.
President
Inactive as of 12/01/85 dUF to
non-payment of franchise tax Mac=~,
Inc.
President/ Regis~ered
Agent The faust Company a f San Antonio Mac=~
Spor~s
Construction, Inc.
Cup, Inc.
Macro Realty, Inc.
President.
Active - not in good standing
Secretary/ Treasurer
Inactive as of 1/20/87 due to no n- pa yme n to-of franchise tax
secretary/ T1:"easurer Regist.ered Agent
Inact.ive as of 1/18/88 due to non-payment of franchise tax
President/
Inactive as of 1/18/88 due to ncn-payment of f:::'anchise tax
Regist.ered Agent Mac:'::! I:lvestment: ~rGper~ies,
Inc.
Robert.s Aspen Proper't.ies, Inc.
JHR
~n~erprise5,
Inc.
Downhill Associates, Inc. '
Inactive as of 1/18/88 due to non-payment. of franchise tax
President/ Regist.ered Agent
Inactive as of 1/18/88 due to
non-payment. of franchise tax
Presiden~/
Inactive as of
Registered
1/20/87 due to
Agent
non-payment of franchise tax
Presidentl Registered Agent Vice President
Inactive as of 1/18/88 due to
of franchise tax
non-paymen~
Inactive a! of 1/09/89 due to non-payment of franchise tax
P~NTIFPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, ~X PARTE, APPLICATION FOR TEMPORARY AND PE'RMANENT INJUNCTION, AND
APPLICATION POR IKPOS ITION OF CONSTRUCTIVE TROST
Page 43
Ci ty M.ini, Inc.
PrE!!iidentl Registered Agent
Inactive as of 1/18/8s due·to non-payment 0 f franchise tax
CATTELL
Corcoration Name
Affiliation
Standing of Cor;Joration
HT Holdings, Inc.
Registered Agenc
ActiV'e Good Standing
Reqistered
Active Good Standing
KV Holdings, Inc.
Agent:
INC.
Registered Agenc
Inactive as 0 f 12/5/88 due to non-payment of franchise tax
CR Acquisitions, Inc.
Registered Agent:
Active Good Standing
Nor~hlake
Secretary
Active Not in goed standing
President! Sec=etary
:naco:ive as of
VISION,
Rater~s
Corporacion
Interescs,
Inc.
~i~e
1/18/88 due c=:) non-payment c f franchise t.ax
~~o
Plus
~~o,
Inc.
Sec roe t.ary I Treasurer
Inacti ve as 0 f 12/2/85 due to non-payment 0 f franchise tax
~acro,
Secret.aryl Treasurer
!nc.
Inactive as of 1/18/88 due to non-payment. 0 f
franchise tax
The Faust Company of San Ant.onio
P~NTIFPS'
Secretary
Inactive as of 1/18/88 due to non-payment: of franchise tax
ORIGINAL PETITION, APPLICATION POR
TE.MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR nKPORARY AKD PER1Q.NENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 44
Mac~o
Realty, Inc.
Sec~et.ary/
Treasurer
Inact:ive as
0
f
1/18/88 due to
of franchise tax
non-payme~t
~ac=~
rnves~ment
Properr;ies, Inc.
Secretaryl Treasurer
Inacti ve as 0 f 1/18/88 due to non-payment 0 f
franchise tax Rober'ts Aspen P==pp.rt:ies, Inc.
Sec::-etaryl Treasurer
Inact:ive as of 1/20/81 due to non-payment 0 f
franchise tax Downhill Associates, Inc.
Ci~y ~ini,
Inc.
Assistant:. Sec~et.ary
Vice President./ Sec=etary
Inactive as of due to non-payment 0 i. franchise tax 1/09/89
Inactive as of 1/18/88 due to
non-payment: 0 f franchise tax
COSTELLO C =:: ::-:: c rat i
c n Name
~.AX:~V.A,
HRC
INC.
Consultant.s, Inc.
Af:':'liation
Standing of Comara cion
Registered Agent
Activ'e In goad standing
President
Inactive as of. 1/09/89 due to non-payment of
franchise tax PRASAD
Cc:-::oration Name
Aff:'liation
Standing of Coroorat.ion
President
Active I good st.anding
P.S.P. Investment Co.,
Inc.
PLAJNTIPPS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR nKPORARY AND PERJoI...AHENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 45
·CONSENT OF BARTLETT TO SERVICE AS INJUNCTION MONITOR i2.
Februa ~
On
16,
,
BARTLETT adv is ed ARMSTRONG tha t
1989 ,
BAR.'!'LETT •.... ould be willing to serve as
a
monitor
Court-appointed
concerning the operations of HAMILTON-TAET in accordance with the te~s
and
mish~
i~pase
be
provisions
until such
ar:.iculat:.ed
and
any injunctive relief which t:.his
of
t~e
fur~her
as
imple!nented
Court
protective measures could
concerning
the
operat:ions
-:f
III. COUNT ONE
Derivative Suit Based Uoon Breach of Fiduciary Duties By Officers, Directors and Controllina Shareholders :3.
Pursuant to Tex.R.Civ.P.
::y
re=::'!..eges
The
-:-..J. ~~S7RONG
pa::.e~~
actions
c:Jmplains
cf conduct,
Original
Plai:itiffs' AR.~s:-~onG
a
reference
cor,s equence
numerical
and ccnduct of
const~:.ute
conti~uing
Petiticn
~~STRONG incorpora~e5
paragraphs
the
1
thrcugh
Oefendant.s
as
derivative 0
Defendants as
f
the means
dnd
and
:':J which
and manifest an ongoing c=urse and
through the date of the filing of herein,
whereby and
through
being damaged as a shareholder of MAXPH.A.R}'J..,
is
':::uble
58,
shareholder
of
and as as
HAMILTON-TAFT,
and manner in which the conduc,:
to which complaint
which
0
f
a t.he
is made constitute a breach of
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST T~ORARY
Page 46
f
iduc iary du tEes of
shareholders per:'':'':1en t
hereto
is. of
~his
to be
owed
record
MAXPHARHA
and
directors
ati all
HAMILTON-TAFT
and
~ontro11ing
times
as evidenced by the facts set forth herein·.
owner
during
one hundred percenc
t~e,
At
CCS7ELLO
shares
the Defendant MAXPHARHA.
of
t= ~ns ac~ions
ongo ing
the
made
the
parent. corporation and sole owner
all times mat.erial and pert.inent heret.o,
were
direct.ors
the
and
officers
and ROBERTS was
by
e'J'idenced
As
:Jas is
of 0
f
(100%) of the out.standing shares of P-AHILTON-
cor~orat.ion ~~p~~,
".
500
ARMSTRONG was and continues
least Februarf 9, 1989.
TAFT ~hrough at
75.
of
~PHA.R."!A· ~as the
th':'s sui t,
the
of
the
PRASAD
and
defendant
a controlling shareholder
fac:.ual
recitat.ions
set.
for'th
the Defendants have engaged and are engaging in a course
?at.tern
unla''''fully
of
interests the ~ e in, ~.AX?~ARM.A
by
conduct
deprive,
l"J\.X?F...A.FL"tA of
1989,
f fie ers,
suit and at the present
Fu r:.~e!'Jlore,
and
0
At the time of the ongoing transactions made the basis
a
he~eLn,
by
constitut:'nq
deny
or
in
scheme
defraud
the
and
ar't':":ice
to
shareholders
of
the true and fair value of their respect.ive equity
in MAXPHARl-f..A derivat.ive a!l
a
we 11 and
as to
effectuating
de r i vat. i v e
from
=
f c m the
HAMILTON-TAFT and
t.heir
causing
as the
of
shareholder
rig h t. f u 1 at
least
dissipation,
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORARY AND PERHA.NE.NT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTI~ TRUST
status
i n t ere s t
S
February
0
f
9,
conversion,
Page 47
misappropriation, and
waste
of
relationships
corporat.e
co~?orat.e
and
exist:ing
Wit h out
1 im ita t ion,
ACQUIS IT!ONS,
of
scheme
t.o
~~e
in
the
alter ego, ~ix
af
ref'Jsed
on
and
as
ext.ent
said
income,
as
t.he
forgi'Jeness
liabil i ty
tax
of
afEiliateg
",..rell
BELL,
wi thout
1 imi ta tion
evidence
reflects
and
Five
Twenty
in March 1988, via
VISION
to
the
to
abovecapi tal
as a consequence of t.he series of
entities
were due on June 1,
de!'r.and
the
through
dis s ipa te and ....,as te
caused MAXPH.A.RM.A to
Hundred
(56:£::,000.00) whic~
the
abo v e
R08ERTS,
forqi'Jeness
of
indebt.edness
of
reduc~ion
and/ or
in
form of accounts receivable.
Furt.her
he=~inabove,
of
to
inc idents
'79.
h is
and
for ~ h
ass e t
~PHAR..'{A
af
to
HAMILTON-TAFT
HADID
incebtednesses
asse~s
artifice
various
the
cosr::Lr...o,
c rea t.es
int.er-
f
a'iILTON-TAFT have bene f i t.ed
shareholders
and
~UPHARJ-f.A and
loans
0
RADID, BELL, CHRISTIANA, VISION,
and
MAXPHA1U'..A
of
det.riment
aut.l l..:led
result
a
f act. 5
the
evicence that. ROBERTS, COSTELLO,
the
as
opportunit.ies
stock ownership_
i 8.
CR
business
corporate
for
tender
pa~ents; and,
on
payment
in
information
the
that
ROBERTS,
se~
as
:or~h
·..-IS~CN
via
as
loan VIS ION the tot.al amount.
(2)
bot.h
and
NollOO
Dollars
Promissory Hat.es each of
Although of
Eacts
Thousand
t-..IO
1988.
payment.
to
MAXP~.A
notes,
principal, and belief,
VISION
while has
made
failed
making
now
~ritten
~nteregt:
forgi.'Jen
indebt.edness.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR T'eKPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEMPOR.A..RY AND PERKANEHT I NJUNCTI ON, AND APPLICATION FOR IMPOSITION OF CONSTRUCTI~ TRUST
and
Page 48
said
•
Fur~thermore,
80.
and
hereinabove,
referenced
withoUT:
abou~
or
on
limitation March
to
fact.s
the
198~
8,
HADID
I'
,
ROBERTS, and COSTELLO caused HAMILTON-TAFT to loan HADID the sum of Three ~~llion and No/lOO Dollars (53,000,000.00) which was due and payable on or before April
4,
1988.
was been made by MAXP~~ on RADIO, Note
the
was fac:.
said
been
nOT:
damaged
was
the
t:o
23,
Mar::::h
the
1988,
.s h a =- e hal d e r e f :.her-eo f
in
CHR:ST::ANA No/lOO
and
the
of
in
a
Dollars
and
however,
upon
ago
per:or:nance
facts
alleged
ROBERTS,
to
the Note,
Ho~e.
and,
fJ..A..MIL:'ON-TAFT,
de 1 i \Tared infomation
of
ROBERTS,
of
his
by
to
those
t
'J' ely
as
f
0
:. n t: e r ~ s t
the
0
CHRISTIANA
and
with
controlling
evidencing
as
a as
about.
loan
:'0
Five" Thousand
chairman
solely
interest.s
a
without
or
on
HAMILTON-TAFT
Note
belief,
dealing
i
as
Sevent.y
the
aC':ing
a
caused
ROBERTS
and
business
V'
Hund=ed
Eight
of
act.ing
ci e r i
but:
herein,
which
~PHARMA
of
and belief,
det.ail
while
($875,000.00),
prejudice
in
despite
transac'ti.on
shareholders
infot:71a~ion
upon
~...AX P HARM
sum
the
exec u t.ed
or
MAXPHAR:tA
interest:
Additionally,
1 imi ta tion
hant
and belief,
infonnation
Thus, KAnID is in default under the terms of the
81.
alte!"
by
forgiven
equity
the principal amoun~ of the
in default under the terms of
that HAD I 0 was
Not.e
s~cck.
and on
paid;
Although written demand
f is
wh.ich
it.
merely
device Despite
for :0
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
the the
cause
mul tiple
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR 'reXPORARY RESTRAINING ORDER, EX PARTE, APPLICATION fOR ~1fi'ORARY AND PERMANENT INJUNCTION, AND
was
CHRISTIANA;
conduit a
and
page 49
ye~
been
Seventy
Five
demands for payment, no part of the CHRISTIANA Note has paid,
and
the
amount of
principal
,
Eight Hundred
Thousand and No/IOO Dollars (5875,000.00), together with
in~er~st
thereon
although
demand
from has
March
been
23,
made:
1988,
remains
al though,
on
due
oWing,
and
informa tion
and
belief,
ROBERTS and COSTELLO may have recencly caused the indebeedness to be
forgiven,
as
furcher
shareholders in and as
ar~i~ulated
82.
to
damage
upon
~XPHARHA
Promissory Note
information
executed
and
fo=~h
and
=e d
cc~cn
by '!'"..... o s~cck
belief,
to
~i 11 ion
of HAMILTON-TAFT,
under
notified
info:-:nation
... ithcut
whic~
execu ted
and
and
the
de 1 i'Je!:"ed
to
ROBERTS
belief
of
aided
of the
~he
FIRST
default,
5
-"'as
h a!" esc f ~eld
MAXP~~
by
his
ROSENBERG
under
MAXP~~~
ROSENBERG
and
its
:iundred
had teen theretocore
As of December 15, 1988, terms
~uly
~·h':ch
F i f ~ Y Ni n e :- ~c usa nd (2, 0 5 9 , 0 00)
the FIRST ROSENBERG NOTE.
RCSE~aERG
the
ROSENBERG
{S61S,OOO.OOl
personal Guaranty, guarantying the obligations of
default
but
in the original pr':":Lcipal amount of Six
ROBERTS
in
of
herein, on or about
delivered
and ::'::.een Thousand and No/lOO Dollars 5 e ~ t.:
intere!t.s
hereinabove.
Also,
1988,
the
the stock of ~.AXPH.AR..'iA and HAHIL:'ON-TAFT,
limitaticn to the allegations set 14,
to
was
NOTE.
R"OSER:'S,
and abetted by ROSENBERG,
upon
has
caused the indebtedness due and owing on the FIRST ROSENBErtG NOTE to be discharged in such a fashion as to result in the 2,059,000
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..HPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TE.MPORARY AND PERMANENT INJUNCTION J AND
APPLICATION FOR IMPOSITION OF CONSTROCTlVE TRUST
page 50
shares
common
f
'0
percent
an
as
(100%)
~~TRONG
attemp~
or
would show that such transactions were mere
cont,=olled and
MAXP~JUL~
influenced by
and
BELL,
ROBERTS,
PRASAD,
~PHARHA,
to deplete and dissipate the asset.s of
and HAMILTON-TAFT in order to gain cont.rol of HAMILTON-
as the major asset of
for an amount. of Six Hundred
~~p~~
(S615,000.00)
less the
I
market value for such stock.
84.
~~STRONG
~':'::le
CG5 T:': L L a
capac:':'':'es ~?HAR.."'..A, ~he
the
of
RGeE R:- S ,
loot
COSTELLO,
~CQUISITIONS,
KEYSTCNE, CR
and Fifteen Thousand and No/lOO Dollars
t::e
through
by the Defendants, acting in concert with one another
H.AMILTGN-TAFT,
fai~
prev ious ly held
the HAMILTON-TAFT shares
of
RADIO, VISICN, CHRISTIANA,
TAF~
H.AMILTON-TAFT
f
ROEERTS controls.
en~ity ~hich
83.
0
to have been transferred to ROBERTS, who now holds
MAXP~~
hundred
stock
as as
would further and
loans and
and
alleged
transfe~s
H.A D ! D ,
direc'Cor,
alter~acively
of
~~at,
at
alleged herein,
stock
in: h e i r
show
res pe c t. i v e
0
r
.: a rio us
officer or c:lnt.=olling sharehclder of
herein,
corporate assets of
were conspiring MAXP~~
too
dissipate
and
and its subsidiaries, and
did so through a scheme of fraud, breaches of their fiduciary and scat~:cry
and
a
dut.ies and obligations to
civil
~~ILTCN-TAFT
conspiracy,
:~e
shareholders of
intentionally deceiving
and their respective Boards of
~~?~~
MA.X?HARMA,
Director~.
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR nHPORARY RESTRAINING ORDER, EX PARTe, APPLICATION FOR TEKPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF
CONSTRUCTI~
TRUST
Page 51
85.
Fur-cher
and
alternatively,
and without
limitation of f
the facts an
attempt
No/lOO to
as alleged hereinabove, for
Hundred
Six
direc~or
cor~oration
fraud VISION
of
the
and
~PH.AR.."'.A
t.he
corporat.i~n,
the
by
never
Upon
intended
HAMILTON-TAFT.
and
HA...'1ILTON-TAFT)
of
!:'easonable
The
Hundred
Fifteen
value
of
the
2,059 COO
in excess
of
such
~PHARMA
of
the HAMILTON-TAFT shares
intended for conversion amount,
damage and injury to
that.
the
the
all
and that
!,Jas
due also
(to wit:
out-standing f~~m
for
Dollars
fair
the
and
shares
HAXPHARMA
in
belief,
amounts
No/lOO
a
of
was
well
ulti..rnat.e divest:.rnent
from
cons-citutes
a
substantial
~~PHARMA.
ARMSTRONG would breached
so
and
of
such corporation
fac~ I
ego
MAXP~~
of
T:-tousand
the
alter
ROSENBERG NOTE
asse~
so
receiving,
and
Dollars
shareholder,
repay
fIRST
not.·",iths~anding
market
Defencant.s
Million
No/lOO
information
to
~~ILTON-TAFT
86.
and
an
to essentially purchase
Six
(5515,000.00),
and
cent.rolling
corporations.
HADIO
and
amount
Three
Thousand
Five
an attempt. to loot the sale corporate
:he
of
amount
from RAMILTON-TAFT and for VISION
Twenty
controlled
upon
the
from MAXPHA.RJof...A in the guise of loans to an officer
(5625,000.00) ~nd
loot
(S3,OOO,Ooo.aO)
Dollars
loot
to
RADIO
the various Notes were made in
fur~her
thei.r
and add:t:onally show that the
fiduciary
duties
to
MAXPHARMA
in
directly or through cont=olled entities or affiliates,
PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR TE.HPOM..RY RESTRAINING ORDER, ex PARTE, APPLICATION FOR 'ttKPORARY AND P£RHANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 52
personal
loans
Defendants
from
never
oppor't:unities,
and
and
MAXPHARHA
intended
to
convert:ing
the
RA.M.IL'I'ON-TAFT,
usurpinq
repay, major
asset
of
the
which
corporate for
MAXPHA:RHA
less than fair market value. AR~STRONG
87.
has
relieved from any requirement:,
effor't:s
no
made
to,
should
and
to have t.his sui t
brought for the
consideration of the respective 80ards of Directors of HAMILTON-TAFT,· since
and
demo ns tra t e
:.ha t.
any
the
facts
e f for-=.
sue h
outlined
as
ROBERTS, as a controlling shareholder of TMT,
either directly or derivat.ively
e x ere i
5
per son s
ed
by
ROB E RT Sup 0 n
directors
of
such corporations,
~PHARHA
from
whose rv e now,
and
upon
as
in
that:
?~ILTON-
the 0
clearly
control
f f ice r
informat:ion
r
and
sale
c=nt~ol5
t~e
80ards of Direc:.ars of any ccr;orations or corporat.e
of::ce~s
and directors as to
Peti~ian
c=uld
Defendants, ot~er~ise
less fraud
t~an
to
the
allegations
other",ise
would
not
~hich
be
have
P.AMILTON-TAFT,
con~ained
than
aCl:.ions
in
this
through
against
admitted to their conversion of corporate fair markel: value,
in obtaining personal
breaches loans
accordingly
or whom decisions with respect
resolved
taken
and
0
t.he
=esponse
of
above
fu ti le,
arising
and
~~p~~
be 1 ie f.
to
shareholder
be
'",ou ld
be
0
f
Original
suit.
themselves
or
proper~y
for
f iduc iary duties,
:rom the Corpora ticn,
and
wi thcut
ever intending to repay such loans.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORDER, EX PARTE, APPLICATION POR nKPORARY AND PER.MA.NENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
The
~RARY
Page 53
8S.
The facts as sec forth hereinabove further evidence thE fiduciary duties owed to the :ninority sha~eholders ot
breach of
HAXP~..A including
MAXPHARMA
(viz.,
do
to
HAMILTON-TAFT)
in
proposed
the
89.
C:::1
Based on
LTON-TAFT, to
do,
of
vote
':0
on the ·sale or
~P~JUL~.
foregoing,
since
which
AR~STRONG
t.he Defendants
r-t.AX?P..A.RMA
HADID,
ACQUISITIONS
H.A.."!!~TCN-TMT
and
PRASAD,
CHRISTIANA,
ex~enc.
hold
the
~...A.XPP.ARH.A
:hey
fears
will
VIS:ON,
are nat stopped entirely,
both "'~PHARHA and HAMILTON-TAFT, ~~TRONG,
::-easc:;ably
their assets if and to the
deprived cf aELL,
from vat.ing on said
appropriate and distribute the asset:s of
to
c. inue
the
transact.ion
asse~
transfer of the principal
HA~I
and ",olithout
shareholders
exc~~ded
the
of
a result and consequence of :he existence of a vested
inte~est
power
the'· extent
notice
''''ithout
being provided to
so
affording shareholders not otherwise mat.ter as
to
has effectuated a transfer af the primary asset
other Defendants,
int.ention
limitation ARMSTRONG,
individually and in collusion and concer~ with the
that ROBERTS,
of
without
cant:inue
ROBERTS,
and
will to
be
COSTELLO,
KEYSTONE,
and
CR
thereby causing shares in
includi~g
those shares owned by
to be greatly depreciated in value or rendered totally
·.Talueless. 90. under
The
future
management
circumstances
suc::ess
exercising
following
of
~..AXPHAR.\I.A and
sensible
:,usiness
HAMILTON-TAFT, judgment
restoration and disgorgement. of
PLAINTIFFS' ORIGINAL PETITION, APPLICATION POR TE:KPORARY RESTRAlNING ORDER, ex PA.R'n, APPLICATION POR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION fOR IMPOSITION OF
CON5TRUCTI~
TROST
and
assets
Page 54
wrongfully
divested,
accordingly.
However,
specifically without VISION,
will
be
successful
the conduct of
limitation
CHRISTIANA,
and
Crt
prevented by injunctive decree, will each
of
of
MAXPHARMA
ir=eparable
injury to
~~?~~ and
of
bee a. use
i tis
including -'
des~~~y
unless
gro~h
the
t.here
imp 0 s sib 1 e
to
now
prospects
thereby
causing
inci·.. . icually and in
far ·...hich
SELL,
RADID,
ACQUISITIONS,
MAXP~v~ and
HAMILTON-TAFT,
,
COSTELLO,
HAMILTON-TAFT,
A.RMSTRONG,
their shareholders,
1aw
and
will -appreciat:e
the Defendants,
ROBERTS,
KEYSTONE,
and
right.
of
HAMILTON-TAFT and all
:'s no adequate remedy at
c: a 1 c u 1 a t. e
IN
i ~h
~ther
or
d ama g e S
specificity. Fur~hermore,
91 .
addi~ional
relief,
injunctiV'e
relief
escablishmen1: of :-filii-on
Fi::y
a
and not by ·... ay
temporarily
stock, such
if
such
stock
wrongfully
is
Nine
Thousand
transfer was
convert.ed
the for
cont=ollinq shareholder of relief,
ARMSTRONG seeks
P~NTIFFSf
not main
les
5
by
~:>
way of
would
·..·h.:.ch
hold
in
shares
equitable
incl:Jde
the
the
T"JO
tr.ls't
of
P..Al'!.ILTON-
cr through CR ACQUISITIONS,
Defendants
the
has
1 imi ta c ion to
(2,059,COO)
direc~ly
restrain
or
tr:.:s~
construct.i'Je
f
seek,
Cou=~,
this
TAFT now held by ROBERTS, to
would
ARMSTRONG
from
0
as
yet
asset.
than
~P~~.
f:=om
transferri.:1g
:ranspired,
of
fai=
given
!{AXPHARMA,
market
Also,
value
or
such
that
a.nd was by
the
by way of equitable
disgorgement. of HAMILTON-TAFT steck held
ORIGINAL PETITION, APPLICATION FOR
TE.KPORARY RESTRAINING ORDER, EX PARTE, APPLICATION
FOR TE.JWORARY AND PERKA.N"fNT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 55
by
or
ROBERTS
ROBERTS
any
individual
affiliaced or associated,
is
or entity
corporation
that
~it.h
which
Court set aside
this
any such conveyance of the HAMILTON-TAFT stock. 92.
ARMSTRONG'S successful prosecu't.ion of
TAFT,
therefore,
and
expenses,
AlL'{STRONG
inc ludi..ng
c~e
is
en't.i tIed
reasonable
AR~STRdNG
connection,
compensate
would
the Ten
show
that.
($125,000.00)
~rosecution
~~S~RONG
a
acti.on will
and HAMILTON-
reimbursement
In
fees.
reasonable
of
this
fee
to
undersigned attorneys for preparation for trial of
Dollars
Thousand
to
att.orneys'
this cause in the amount of One Hundred No/100
~PHARHA
substantial benefit to both
result in a
this
of
and
t.hat.
~~enty-Five
the
expenses
Thousand and incurred
in
this suit are expected to total in excess of
Dollars
(S 10,000. 00),
for
which
further
sums
seeks reccver/. COUNT TWO
Breach of Fiduciary Dutv
93.
Pursuant to Tex.R.Civ.P.
realleges
by
reference
58, ARMSTRONG incorporates and
numerical
paragraphs
1
through
and
including 72. 94.
Due to t~e incorporation cf ~~PHARMA in Tennessee, and
the incorporation of adhere to the them as
rJL~ILTON-TAFT in California,
fiduciary duties
Defendants must
and responsibilities imposed upon
prescribed by Tennessee and California law.
The duties
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAINING ORDER,
ex
PAR~,
APPLI~\TION
FOR TEliPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 56
responsibilities
and
only
to MAXPHARMA, as
HAMILTON-TAFT 5 i mil a r 1 y ,
the
California
law
California
imposed
by
as
a
Tennes see
a
wholly-owned
d uti e 5 would
corporat.ion,
but:
of
subsidiary
only
not
to
also
to
apply
but' also
corporation,
res ~ 0 n sib i lit i e s
and
apply
law would
Tennessee
not
as
to
HA..XPHARHA.
im po sed
un d e r
HAMILTON-TAFT,
~PHAJUof.A,
its
COSTELLO,
LITCHFIELD,
as
a
controlling
parent corporation. Specificaliy,
95. P~SAD
upon
in
have
them
violated
as
discharge
duties
those
and
as
ac~ing
dut.ies
t.heir
directors
good
in
similar ci=c'..lIIlst.ances; be
to
in
r.he
addition,
Defendant.s,
Tennessee
Code
part:icipated
and
did
bes t
in
act
interes t.
imposed
in
transactions
cf
which
i.n
they
with
the
did
care
not: an
would exercise under
a
i.n
manner
the
LI7CHFI~!..O
548-18-302,
Annotat.ed
nor
posit.~on
not.
COSTELLO,
~PHAR.."!A
of
faith,
ordinarily prudent. person in a like
=e 1 i. eved
~esponsibilities
and
preser ibed by Tenne!!see Cede A1lnota ted S48 -18-30 1,
while
that.
Defendants,
reasonably
corpora tion.
and
PRASAD
that
these
:hey had
a
In
°Jiolated directors
conflict
of
in:erest bue did not meet the following dut.ies: a.
The
material
directors or officers to
the
facts
t.he
transaction
and
the
interests were noe disclosed or known
Board
of
Di=ectors
and
the
Board
Directors
of
0
f
or
committee
of
the
Eoard
Directors or committee did
authorize, approve or ratify such t.ransactions;
PLAlNTIPFS' ORIGINAL PETITION, APPLICATION FOR TEXPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEKPORARY AND PERKAHENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 57
of
not
b.
The
the
the
of
fac':.s
in~eres~s were
or officers
directors to
mat.erial
entitled
shareholders
to
transaction
and
not disclosed or known vote,
they.· d'id
and
not
authorize, approve or ratify t~e transaction; and
c.
The
transac~ions
Defendant.s
96.
Tennessee
those requirements set
to
directors
LITCHFIELD
and and
L::'C~F!::LD and
COSTELLO,
Annotated
Code
were unfair to the corporation.
§48-18-3032
~orth
officers. PRASAD
suc~
in
not
violat.ed follcwing
it relates
Code as
to loans
Defendants
COSTELLO,
the
unlawful
liable
=e
by
(1988)
Acc==dingly,
would
PRASAD
for
distributions as set forth in Tennessee Code Annotated 548-18-304 (1988).
Defendant.s
Tennessee
Code §48-18-403
~P?'-AJU4'..A
but
·... ith
the
did not:
care
thei= duties in~erest
under similar
in a
manner
:':1
that
t:-tei..~
PRASAD
violated
they were officers
cuties
in
good
pruce!"'.t ;:erson
in
a
circ-..:...~s~ances;
faith;
of nor
like
position
and did not
exercise
r€asonably believed to be in the best
of the corporation.
97. COSTELLO,
Additionally, LITCHFIELD
Cede §309 with respect and
exercise
and
:":TC:iF!E:L..D
(19BB)
crdinarily
an
would exerci.se
COSTELLO,
officers
of
and ~o
and
in
PRASAD ~he
California
-:he have
dut.~es
alternative, -.·iolated
ot
~ood
corpora-:ions.
Defendant.s
California Corp.
faith
These
for direct.ors Defendants
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRAlNING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PER.KA.NENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 58
did
not
ac~
the
best
interest
of
the
corporation
including reasonable inquiry, a like
~hich
in good faith or in a manner
~osition
S310.
Defendants
corporation
and
shareho Ider or di~ec~~rs
!h~eholders,
its
an ordinarily prudent person in
violated
Defendants
0
California
Corp.
Code
participated in or were present at a Boar1 of or transactions bet...,een t.he
meet. Lng ..... herein contracts
Di=ec-:crs
or
would use under similar circumstances.
Likewise,
98.
as
they believed to be in
one
or
f': icers
more
of
i-:.s
had a rna ter ial
Directors, financial
controlling
interest:.
The
additionally failed to fully disclose or make known the
direc'tors'
financi.al
interest
to
shareholders
the
and
seek
approval of the t=ansaction by the shareholders, while excluding from
the
vote
officers
of
i:lf:Jr;:1at:ion disc~~se
vote
by
the
shares
ccnt=alling
and
thei=
those
::el.iei, in:eres~
Soard
by
interested
shareholders.
the
transaction and
Di=ectors
transaction while counting the
approving
vote of
conc=olling shareholder or officer,
the
Defendano:s,
COSTELLO,
violated California Corp. t.hose
presc=ibeci
dut.ies
~ode
f:llly
t::::l
in a
par~icipated
such
contract:
or
interested direc:.or,
corpor~tion.
LITCHF!ELD
§31S,
imposed
failed
upon
and such transaction was not
just and reasonable or for the benefit of the 99,.
directcrs,
Additionally,
Defendant: direccors
in the
of
owned
and
PRASAD
also
in that they did not follow
..... ith
respect.
P~NTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
to
loa.ns
t.o
Page S9
or
guaranties
of
obligations
security of corporate shares. acting loans
as
directors
of
the
c:Jntrolling
and
direc~ors
of
officers,
or
on
Specifically, the Def'ndants while
officers
corporation
or
to
of
the
various
shareholders without
corporation approved
directors, of
disclosure
officers
the
and
transactions
and approval of the shareholders and/or the directors as
required
under California law. 0 e f eon dan t
100. The 5
h are hal de r
ent.ities entities
or
a
to
101. Defendants looting
subsidiary,
borrowing
a
d ire c t. 0 r or
by
S
0
r
con t r
0
f
MAX P HA R.."'tA
concert
in
·,.,ith
~XPHAR~
t.o
their
use
0
r
said
ability
t~eir
alone
and/or
The
off':'cers
dominant:
and
the to
or
were misappropr ia t.e
of
act.i~i~ies
a
manner
detrimental
breached
thei:=-
fiduciary
in
and/or
directors
power to control corporat.e
to
the
MAXP~~.
have the
assets
HAMILTON-TAfT.
and/or
manner.
of
~PHARHA
~hat
misappropriation
of
and
through
the
knowing
duty
itg
corporate
and
assets
the
which
and which
intentional
use
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
by
wholly-
looting consisted of
Plaintiffs believe Defendant.s never intended to repay,
P~NT!FFS'
11i ng
0
fiduciary responsibilit.y to
equitable
minority shareholders of
o\o.l1ed
have
shareholders
themselves
sysr.ematically
and
5
controlled
of
and
may not use
benefit
dam ina n t a n d /
and its wholly-owned subsidiary, HAMILTON-TAFT,
just:
C8:1c:-olling
as
off ice r
shareholders
fair,
~~r~~~
r
individuals,
con~rol ~~PHARMA
in
0
indi . . . iduals
or
minority
a nd /
5
5,
Page 60
of
•
fraudulent.
misrepresentations.
In
Defendants,
addition, f
COSTELLO,
their
LITCHFIELD
as
duties
and
directors
properly
PRASAD
failed
and/or
officers
in
disc::harge
to
MAXPH.A.fUI...A.
Such
duties included, but. are not limited to, the dut.y to act in good faith
and with
would
position manner he
care an ordinarily prudent person in a
exercise
to be
Defendant.s COSTELLO, st.andards
these
Plaint.iffs
similar circumst.ances
under
reasonably l:elieves
cor;=oration. meet
the
~PHAR...U.A
and
and
their fiduciary duties,
in
in the best interest: of
a
the
LITCHFIELD and PRASAD did not
breached
A..FJof-STRONG,
their
both
fiduciary
duties
individually and
to
as
a
Furt.hermore, these Defendants breached
~~PPJUl~.
shareholder of
and
like
in :hat they participat.ed in transactions
concerning the corporation in which a director or officer of the cor;:oration LITC:::IELD
the
and
PRASAD
material
CHRISTIANA,
not
fact.s
ent.itled
authorize,
addition,
such
Defendant.s
had
indirect:.
such
indirect.
breached of
indirec-:: their
interest.
fic.uciary
transactions
:he
t.o
or
appro\re
breached
int.erest:
In
vote.
transactions
Lastly,
an
or
COSr2:LLO,
duties,
concerning
Ln
VISION,
in
interests were
addition,
ratify
were
these shareholders
such
unfair
to
their
fiduciary
the
transactions
not made
transactions. the
duties
known to
!n
corporation.
because
stated above,
they and
the shareholders
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION POR RESTRAINING ORD2R, EX PARTE, APPLICATION FOR nKPORARY AND PERKAHEJIT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
~RARY
i
that
and HAD! 0_ -were not'. disc losed or knoown t.o t.he
ROBERTS,
shareholders
did
direct.
a
had
Page 61
entitled to vote in MAXFHARMA.
As a direct and proximate result,
the
actual
Plaintiffs
have
suffered
damages
e~ce5s of
in
514
million for which Plaintiffs seek recovery. 102. By
vir~ue
of the willfull and malicious fraudulent acts thei~
of the Defendants and their breach of
c:y
':ohern
to
e!ltitled to
the
Plaintiffs
and
it.s
fiduciary duties owed
subsidiaries,
recover exemplary damages.
Plaintiffs
P lainti f fs
show tha t
are an
award of substantial exemplar! damages is necessary to serJe as a det=iment
to
such
unconscionable
conduct.
Accordingly,
Plaintiffs hereby seek recovery of exemplarj damages in an amount in excess of the minimum
ju~isdic~ional l~its
of the Court.
COUNT THREE
Consoiracy ~o
103. Pursuant. =e~lleges
Tex.R.Civ.P.
by reference numerical paragraphs 1 t.hrough and 72.
L04. De fendants '.ral'.Je of
58, AR.'l-5TP.ONG incorporates and
Plaintiff
ent.ered
int.o
AR.."tSTRONG'S
a
conspiracy
invest.:nent
to
diminish
the
in MAXPHARHA and also
entered into a conspiracy to loot the assets of MAXPHARMA and its who lly-owned subs idiary, Plaintiffs,
all
to
Ail"'!STRONG,
both
Defendant.s
acted
HAMILTON-TAFT,
in a
CO!tUTlon
and
as
a
carried
out
in
0
f
shareholder of l'f..AXPHAR.MA.
design in concerted action to loot
the assets of MAXP~~ and its subsidiaries. was
g~in
and detr:-rnent of MAXFHARl"'..A and to
the damage
individually
for the personal
overt
acts
by
This common design
Defendants
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAlNING ORDER, EX PARTE, APPLICATION POR TEMPORARY ANTI peRMAN"eNT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTTVE TRUST
through
Page 62
systematically making personal loans to Defendants. Defendants
designs were carried out.
common
I
divestment and alienation
and forgiveness of f
no~es
payable. shares
addi tion,
De fendan ts
actions
~.AX?H.AR-'{A
and
minimal
0
its
I
subsidiary
jurisdiction~.of
105. Specifically,
in ov,r1;
acts
by
from MAXPRARMA of HAMILTON-TAfT_shares
ARMSTRONG'S
val ue
In addition,
Defendants' actions caused the in
MAXPHARHA
caused in
damage
to
dec 1 i ne .
and detriment:
amount:
in excess
Tennessee
common
an
In to
of
the
law,
the
Cour~.
this
pursuant
to
Defe~dants
committed a civil conspiracy to diminish .the value af
P1a i
A Rl-f..5TRONG • S
n t. iff
assets of
~~PHARMA
51..:::5
id':'ary,
uniat,,;ful
or
means,
un~awiul ~urpcse,
subsidiary, Defendants loo~ing
in
MAXPHA.R.MA
and its wholly-owned subsidiary
looe.
to
and
the
~~ILTON-TAFT
in that the Defendants conspired to commit an
for personal gain,
unlawful pur?ose,
inves t:nent.
that of looting the assets of
sought in
accomplish
to
that
the
Defendants
legitimate
a
conspired
that of looting the assetS of
HAMILTON-TAFT,
conspired
to
for
commit
personal an
~~p~~
purpose
by
c::mrnit.
an
~~p~~
gain,
unlawful
to
and its
in
and its
that
purpose,
that
the
of
the assets of MAXPHARMA and its subsidiary, or sought to
acc::mplish a
legitimate purpose
by unlawful
t.he Tennessee corporate law and acted cc~~it.ting
overt
ac~s
means,
in ·.riolating
in a concert of
action,
and for a common design.
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR ttMPORARY AND PERHANEHT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTrvE TRUST
Page 63
106. In
addition
in
conspiring
and
combining
conspiring to loot. the assets subs idiary J all
to
to
HAMILTON-TAFT,
the
~~TRONG
damage
di=ectors
and
direct.ors
approval I
and
exorbitant.
to
of
for
do
a
civil
Defendants
wrong,
that
of
its wholly-owned
personal gain of of
the
law, fn agreeing
MAXPH.AJUI.A and
detriment:
the
Def endants I
MAXPHARMA and
Plaintiff
anc cont.rolling shareholders wit.hout.
of
the
other.. . ise
by
and
salaries
shareholders looting
bonuses
sha.reholders,
controlling XAX?~~,
alternative,
in violating California corporate laws regarding loans
officers,
specific
the
civil conspiracy under California
ccmrnitted a and
and
all
to
non-int.erested
corporat.ion and
the
of
or
officers,
the
the
damage
paying
direct.ors
and detri.rnenr.
arid of
KAMILTON-TAYT and ARMSTRONG. COUNT FOUR Fraud t.~
107. ?ursuant realleges
:Jy
Tex.R.Civ.P.
reference
~~STRONG
58,
numerical
incorporat.es and
paragraphs
1
through
and
including 106. 108. As set
for~h
to Tennessee common
and
concealments
equitable
of
la~,
which
duties,
shareholders
above,
that
Defendants committed fraud pursuant.
in committing fraudulent acts, omissions involved as
M.AXPHAR.M.A"
a
breach of
directors, and/or
their and
officers
breached
the
legal
controlling
trust.
and/or
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRA1NING ORDER, EX PARTE, APPLICATION FOR tt.KPORARY AND PERMANENT INJUNCTION, AH'O
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 64
confidence placed upon such Defendan~s as director~, officers and ccn~rolling shareholders
to
~AXPHARMA
and
of
shareholder
of
l"'-A.XPHAR.."i.A.
~XPHARM.A.
its
a~d
shareholders
AR~STRONG,
and of
MAXPHARJ-f...A.
resulted
c::mcealmenl:.s
All
the
ccmmitted
actual
c:=:""cealments, ~.I_~X?!iAR~
rerna ining ac"=.,
its
their 0
all
to
subsidiary,
a
the
the
law,
in
f
an
!-!A.XPf-:..A..RJ-f...A,
and
as
in excess
the
act.s,
a
and o~
Defendants
omissions
and
injury
of
both
under
intentionally
and
caus ing
the
f
~PHAR...1 {A
not
HAMILTON-TAFT
and
inducing
~PHARMA,
individually
and
in
California
regarding
and
and shareholders
alternative
fraud
misrepresentations va~:ous loans
0
Cour~.·
HAMILTON-TAFT,
thereby
direcr;ors
ARMSTRONG,
110. In
5
omissions
aCl:S,
their
by
of
Plain~iffs
Tennessee
,,",hereby
actions,
f fleers,
Plaint.iff
committed
fraud,
resulting
taken
a
they systematically looted the corporate assets of
and
c::::1cea led
under
ass e t
individually
such
minimal jurisdictional limi ts of this r09. Additionally
t:J
being
both
injury to
in
co rpo r a ~ e
the
as
through
Defendant.5,
HAMILTON-TAFT
unconscien~ious advan~age
HA1-!ILTON-TAFT
t~e
subsidiary,
and
individually
100 ted
injury
in
re!lultf!d
Specifically,
s Y5 t em a tic a 11 y
undue
both
ARMSTRONG,
va rio usa c ~ s, and
which
MAXPHAlUC'..A,
their
0
and
addition, laW',
aC1:S
in
and
on
behalf
the
Defendants
that
the
omissions
af
material regarding
to direct.ors, officers and controlling shareholders
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
~ORARY
FOR ttMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 65
~..A.X?HARMA,
cf
making
false
representations
conce'aling such
and
I
loans ·,.;hich and
resulted
in
subs idiary,
its
HAMILTON-TAFT,
knowledge of such fraud, reliance of
good
shareholders ~..AXPHAR."'.A,
of
j~risd:c~~onal
By
of
the
cy
the~
to
a~
serve
the
an
t.he
MAXPF~,
award as
a
their
rely,
to rely upon the upon
=esulting ~ot.h
in
exem;J1ar"l damages.
substantial
dec.errent
the
damage
to
Caur~.
fraudulent. acts
fiduciary duties owed Plaint~ffs
Plaintiffs and thei= subsiciaries,
of
~hich
individually and as
of the willful and malicious
r-eccver
t.o
of
in an amount in excess of the minLmal
limits of this
the
violat.ion
and
Defendants,
l"..AXPHARHA... did
vir~ue
Ac=~rc~~gly,
i:1
of
Defendants and their breach of the
e~:.i':.':ed
t~at.
in
of l-"-A.XPHARMA
with the intent to cause the inducement
HAMILTON-TAFT and A.RMSTRONG,
a shareholder of
~:i.
and
assets
shareholders of MAXP?.ARMA,
the
act.ions
:aith
the
failing to disclose such fraudulent acts, with
fiduciary dut.ies,
and
looting of
the
Plaint.if:s
exemplary damages
t.o
such
is
would
are show
necessary
unconscionable
to
conduct..
Plaintiffs hereby seek recovery of exemplary damages
~ount
in
excess
of
the
minimal
jurisdictional li.!nics of
C-:::.l!'~.
::~.
In
Annotat.ed
addition,
S48-22-102,
t.~e
in
Defendants selling,
tliolaced
leasing,
Tennesse~
Code
exchanging
or
ot~er~lse
disposing of all or subs~antially all of the assets of
~~PHA~~
ocher than in the usual and regular course of business,
PLAINTIPFS' ORIGINAL PETITION, APPLICATION fOR tt.'U'ORARY RESTRAINING ORDER, EX PARm, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTIon, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 66
•
failing to propose and present to all of the shareholders of
in
lI...AXPHARJoI..A
for
vote
a
the
proposed
01
dispos ition
MAXPHARHA' 5 ~
shares
in
H.A.MILTON-TAFT.
Specifically,
the
Board of
Directors
failed to recommend the proposed transaction to the shareholders
or
other~ise
allew
communicate such transaction to the shareholders to
shareholders to vote on approval of such transaction.
the
the corporat:cn
Addi.~ianally,
of
proposed
a
shareholder's
or::er ta cons ider the sale, ~he
af t~.e
HAMILTON-TAFT
Defendants
shareholders of
~p~~
to
not.ify each shareholder
meeting with lease,
stock.
breached
failed
requisite
in
exchange or ot.her dispas i tion
Accordingly,
the
fiduciary
their
notice,
sale is
void and
duty to all of
the
pursuant to 548-22-102 of the Tennessee
C::ce Annot.at.ed.
comrr PIVE Plaintiffs' Entitlement to Injunctive Relief ~13.
Pursuant to Tex.R.Civ.P.
real!.eges
by
reference
58,
numerical
~~TRONG
incorporates and
paragraphs
1
through
and
incl.uding 112. 114. Plaintiffs would show t.hat Defendants have entered into a
c~urse
assecs
of conduce which has of
adci-:':"on, way a f
uses
MAXPHARMA
the
loans
and
looting of made
syste~atically
subsidiary,
its the
corporate
looted the
co~orate
H.AliILTON-TAFT.
as!et.!!
hag
been done
In by
to the De fendants for the Oefendan~.!!' personal
and by way of
divestment
from
MAXPHARMA of
its
principal
asset (viz., HAMILTON-TAFT). PLAINTIPFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
T~RARY
POR TEMPORARY AND PE~ INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 67
con d u c t
115. The
capacities
as
De fen dan t s,
oft h e
officers,
directors,
e i the r.
in
the i r
shareholders,' controlling
persons, and encities or individuals in aid and concert thereof, as manifest and evident thrcugh the concerted course of conduct since January, and
rape
pr~~ary
caused
the asset
to
1988, assets
through and
including
be
of MAXPHARMA (viz.,
reckless-1y
di'lested
failure of
and
disburse
alienated
the Defendants
HAMI~7CN-TAFT)
:::-om
funds
t~e
Ccur~
the
~PP.AR.."1A,
patent.ly eStablishes
of injunctive relief,
t.he
has
successfully
c~her
the
first
combined with
for
need
par~icularly
impaired
been
HA.'iILTON-TAFT
in their capac:ties as set
al:=gatians which have been asserted in ·... hi::~
loot
to permit its shares
thereai~er,
from
has
to ?roperly account and protect for the interest of H.A1'!ILTON-TAFT,
to
of MAXPHA..RM.A through a process ,-,hereby the
CGNC£NTRATION ACCOUNT FUNDS and, t:l
the present,
for~h
thl:!
above
MAXPP~~
and
impos ition
by
in view of previous litigation,
none of
deliberate
Jngoing
and
wlllfall plan and scheme as demonstrated herein. 116. Plaintiffs
is
i.n
immediate
accordingly
danger of
reason of the conduct on the on
~ehalf
of
Oefendan~s
i~~diate threat
value
to
the
of
as
loss par~
set
substant.ial
HAMILTON-TAFT
show
'that
and/or
the
MAXPHAR."'!A
diminution
of the Defendants.
in
stock
value
by
The conduct
for~h
herein poses
harm,
injury and diminution and
st:.ock,
as
~ell
as
to
a c lear
the
~PH.A.RMA
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR RESTRAINING ORDER, EX PARTE, APPLICATION
~ORARY
POR ITKPORARY AND PERKANENT INJUNCTION,
AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Paqe 68
stock.
The potential
b~
loss, harm and injury cannot
accurately
measured; therefore, Plaintiffs are without an adequAte remedy at law.
rf
the
funds,
obtaining
HAMILTON-TAFT, ~PPJUl~
act.i-ons
Defendants
by
are not restrained or
loan
ot.herwise
and are not enjoined
and
from
enjoined
MAXPHAR..1ofA
from
and/or
from attempting to pledge
or HAMILTON-TAFT stock, they will continue to take such
which
A..R."!.STRONG,
are
bach
i.ncluding
detrimental
and
indiVidually and
without
as
limitation
to MAXPH..AR1-''}' and
damaging a
shareholder of
rendering
~PHARHA,
disgorgement
and
re?lacement to be impossible to implement or remedial measure to rest:ore and preser..re
~PH.ARMA
and HAMIL:'ON-TAFT and t:J.e equity
interests of shareholders therein.
Such damages and injuries are
and to a large degree are
cont.i-nuing
incalculable.
Plaintiffs
have no adequate remedy at law. ~H=:REFORE,
bot~
1.
i:1
CONS IOEREO,
:!AXPHARMA
incividually and as a shareholder cf
~ray tha~
shall
PRE~ISES
~he
and
AR..'"!STRONG,
~~PHARMA, respec~:ully
Court:
Enter an order directing
t.hat t.he Clerk of this Cour-c.
forthwith issue a Temporary Restraining Order, to continue
effect until
the
conclusion af
rnj~nc~ion hereinafter
rest.raining ser-.·ant.s,
and
hearing
on the Temporary
set, or until furt.her Order of this Court,
enjoining
employees,
the
Defendant.s,
and attorneys,
and
their
officers,
those
persons
agents,
in active
P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR EX PARTE, APPLICATION FOR nKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
TEMPORARY R..ES'I'RAlNING ORDER,
Page 69 ----
concert receive
or
participation
actual
notice
of
with
the
persons
such
or
entities
Temporary Restraininq I Order,
who from
the :allowing:
a.
Directly
other.,-ise
indirectly
or
transferring,
obtaining, by
whether
loan
acquiring or
or
otherwise,
singularly or in combination, any funds or assets of VISION, CR
ACQUIS ITIONS,
',.,.i thou t
limitat.ion
the
FUNDS or any funds
to
any
of
the
other
., FUNDS")
and/or MAXPHARHA
HAMILTON-TA..F~
including
HAMIL:'CN-TAFT CONCENTRATION
ACCOUNT
or assets cist=ibuted from HAMILTON-TAFT
Defendants than
s':"nce
the
in
December and
normal
15,
1988
(the'
ordinary course
of
business and for adequate consideration: and b.
En~
any
security
~~~ILTON-TAFT
c.
int.erest,
with
1988,
of
grant
any
to
mortgage or
:'ien,
s~=ck
the
requiring
distributicn
monies
from
the
ACCOUNT for any purpose other matters,
to
transferring, third
any other
of either MAXP~~ and/or
and/or on the FUNDS.
Mandator i1y
involved 15,
attempting
encumbrance on the
of
assigning,
indirectly
or granting or
pledging
t=a=t.y
or
Directly
t:hat: at
any of
any
time
the
De fendant.s
since
December
HAMILTON-TAFT CONCENTRATION
~han
the payment of client tax
including without limitation in re~pect thereto the
distributions made on February 14 and February 15,
1989,
in
the amoants of 52 million and 51.5 million, respectively, be
P~NTIFFS'
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER,
ex
PARTE, APPLICATION
POR TEMPORARY AND PERHAHEN1.' INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 70
required to reverse said transac~ions and restore
the funds
,
to
the
HAMILTON-TAFT
ACCOUNT until
CONCENTRATION
further
order of the Court:
d.
Mandatorily
requiring
the Defendants
any of
that.
involved with the sale or transfer on or about February la, 1989, of any shares of KAMILTON-TAFT stock from ~~PHAR¥A to
any
of the Defendants
o~her
A.CQUISITIONS, . or
~~cluding
third-par-:y
without limitat.ion CR
individuals
or
entities
be
to reverse said transactions and restore any such
required
HAMILTON-TAFT stock
MAXP~~ un~il
to
further or=er of
the
Court;
e.
Altering,
relocat.ing from irnpai=ing
the
documents
of
transfer fro m
of
their
normal
location,
Defendants
asset.s
any
MA XP HARMA
0
r
or
concealing,
or in any otherJise
any
of
the
records or
relat.ive
to
the
receipt
discoverabiii:y the
destroying,
modifying,
of
?r=:perty since
HAM I L TON - T AFT ,
January
inc 1 u din g
1,
or
1988,
wit. h 0
U
t
limitation in respect thereto any funds distributed from the HAMILTON-TAFT CONCENTRATION of
MAXP~~
or HAMILTON-TAFT,
in respect t.heret.o, records the
ACCOUNT
the
st.ock
particula~ly
with respect. to accounting
evidencing t:te distribution of any funds
affiliated
~ith
regis~ers
but not by way of limitation
Defendant.s and any enti:y or
P~NTIFFS'
or
individual
to
any of
associat.ed or
or controlled by any of the Defendant.s.
ORIGINAL PETITION, APPLICATION FOR
TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR T"eXPORARY AND PERHAHENT INJUNCTION, AND
APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 71
upon
hearing,
restraining
trans fer=inq and/or
J.
1 ien,
agents,
at.t:orneys,
funds-, and
by
representatives othe~Jise
acquiring or
loan or other-rise, assigning,
from
and
from
MAXPH.AR.MA
transferring I
pledging
me rtgage,
or ather enctL"':'tbrance on the
HAMILTON-TAFT
st.ock
a
pending
MAXPHARJof.A
hearing
on
tl1e
Injunction; That
that
upon
Defendant.s, damages
their
issued enjoining
or attempting to grant. to any third party a securi:y
and/or
Pe~anent
be
Injunction
indirectly obtaining,
HAMILTON-TAFT
in t.eres t.,
and
or
any
g~anting,
stock
Temporary
Defendant.s
directly
from
or
a
,
to appear and !lhow cause and that
be cited
Defendants
2.
Defendants final
trial
jointly and
f:;r
the
be
cited hereof
severally,
violation
of
a;:pear
t.o
eno:er for
a
actual
~hei=
and
ans'''''er
Judgment.
herein against:
and ccnsequential
fiduciary
duties
t~
Plaincif:s; "'. ac~ual
:udgment: against Defendant.s,
for
and consequential damages arising cut of Defendancs' civil
cons~iracy
5.
jcintly and severally,
against Plaintiffs:
Judgment
consequenc.ial damages
against
result.ing
Defendants from
for
the willfull
actual
and :nalicious
fraudulent. conduct. of Defendants:
PLAlNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION POR TEKPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
and
Page 72
6.
Judgment against Defendants,
exemplary civil
resul tinq
damages
conspiracy,
and
breach
from of
jointly and sev~rally, for fraJdulent
Defendants'
~heir
fiduciarf
acts,
duties· againsl:
Plaintiffs; 7.
Attorneys'
fees in a reasonable amount as dete~ined by
the Cour'C. 8.
Costs of suit;
9.
Interest
after Judgment
as
provided
by
law
from
the
date of Jucgment until paid; 10.
Such other and
further
=,=1ief to which Plainl:iffs may
be justly entitled. Respec~fully
submitted.
C;:::DWIN, CARLTON ,
MAX"J'lELL
I~~~\ill.l-~~
By:
DAVID N. EVERETT
Bar Card No. 06745:00 JOHN C. BUSH
Bar Card No. 034962~O 3300 NCNB Plaza 901 Main Street Oallas, Texas 75202-]714 (214) 939-4400 A~ORNEYS
FOR PLAINT!F'!'
CONNIE C. ARMSTRONG
PLAJNTIFFS' ORIGINAL PETITION, APPLICATION FOR TEKPORARY RESTRA..INING ORDER,
EX PARTE, APPLICATION
FOR TE.KPORARY AND PERKA.HEHT INJUNCTION, AND APPLICATION POR IMPOSITION OF CONSTRUCTIVE TRUST
Page 73
VERIFICATION STATE
OF
TEXAS
S S
COUNTY OF DALLAS
BEFORE
ME,
§
the
undersigned
personally appeared CONNIE C.
Notary
Public,
on
known to me,
ARMSTRONG,
this who
day
being
duly sworn on his oath deposed and said that he is over the age of
twenty one
this
years,
(21 )
Affidavit;
that
Plaintiffs
Original
Restraininq
Order,
Permanent
filings
Ex
Trust,
and
securities
has
Parte, and that
by MAXPHARMA in the
similar
sound mind and competent to make
f
read
Petition,
Injunction,
Cons tructive
he
0
the
above
Application
Application
for
and
foregoing
for
Temporary
Temporary
and
Imposition
of
Application
for
based
review of
on
his
form of 10-Q'5,
filings,
as
well
13-D's,
as
pertinent and
lO-K's,
conversations
with
COSTELLO and BARTLETT, as further augmented by pleadings filed in the
MAXPHARMA/ROBERTS SUIT,
and
including without
limitation
in
respect thereto the proceedings with regard to injunctive relief conducted
therein
and
conjunction with his this
testimony
personal
provided
knowledge,
pursuant
the
theret:o,
in
facts contained in
Petition are within his personal knowledge and are true and
correct.
" /
·1
,
." ,/
I
,
I
/ ~ ."~ , '-- -6' .. ...t::".
eONNIE C. ARMSTRONG.
// PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TE..MPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERKAHEHT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TRUST
Page 74
SUBSCRIBED AND SWORN TO BEFORE ~, by CONNIE C. ~~TRONG on this
/~z::l.L day of FebruaryJ 1989, to certify which wit'hess my
hand and official seal of office.
NOTARY T~E
~UBLIC
STATE
~fPed/P~inted
~y C~mmis5ion
IN AND FOR OF TEXAS
Name of Notary:
Expires:
PLAINTIFFS' ORIGINAL PETITION, APPLICATION FOR TEMPORARY RESTRAINING ORDER, EX PARTE, APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION, AND APPLICATION FOR IMPOSITION OF CONSTRUCTIVE TROST
Page 7S
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Document Links: Start of Document CASE SUMMARY PROCEDURAL POSTURE: OVERVlEW: OUTCOME: CORE TERMS: LexisNexislRI Headnotes COUNSEL: JUDGES: OPINION BY: OPINION:
176 B.R. 895, "; 1995 Bankr. LEXIS 45, SHEPARD'~
~;
32 CoWer Bankr. Cas. 2d (MB) 1727; 26 Bankr. Ct. Dec. 665
In re HAMILTON TAFT & COMPANY, Debtor. FREDERICK S. WYLE, Trustee of Hamilton Taft & Company, Plaintiff, VS. HOWARD, WElL, LABOUISSE, FRIEDRICHS INCORPORATED, a Louisiana corporation; HOWARD WElL FINANCIAL CORPORATION, a Louisiana corporation; and LEGG MASON, INC., a Maryland corporation, Defendants. Chapter 11, No, 91-3-1077-TC, Adv. No. 93-3-121-TC UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA 176 B.R. 895; 1995 Bankr. LEXIS 45; 32 Collier Bankr. Cas. 2d (MB) 1727; 26 Bankr. Ct. Dec. 665; 32 Oil & Gas Rep. 1727
January 18, 1995, Decided January 19, 1995, FILED
CASE SUMMARY PROCEDURAL POSTURE: Chapte~ II bankruptcy trustee brought an aC1:ion to recover, a! a fraudulent conveyance, transfer! mad" by defendant pursuant t.o a reverse repurchase agreement used to facilitate Co leverag~d buy cut under 11 U.S_C.S, § 546{e:.
OVERVlew; Chapter 11 pursuan~ (~ C
reverse
ban~rup[cy r~purcha5~
brought an aCLion to recover. es c fraudulent conveyance [ransf~r~ mad~ by defendant cgreement used to tacjli~ate leveraged bUyou!. The ~ourt held that the Ban~rup[cy Cede ICodel,
tru~~ee
j
l' U.S.C.S. § 546lel, prevented t.ruste~ trom recm,oerin9 such transfers. ThE: transaction in which debt.or sold a trea'!;ury bill to defendant u!te~ agreeing LO repurchase the bi11 came within the broad definition of settlement payment under ~ht Cooe, 11 U.S.C.S.§ 546(e!, defining settj.ernent payment as an}' transfer of cash or secu=it.ies c:ompletinQ G securitie.s tI"ansactlon. Fur-t.hern,ore, even :if defendant knew that transactiofl was pert of C: leverogeri buyout~ the transact:ion could not. be recovered c!: g fraudulent transfer because th~ (Dd~, § ~46(e)f barred recover, of settlement payments more [han one year pre-petition irrespective of ':Jefendant"'s mental sr,atf"!. The co~rt a150 hf!ld that the Cod~, 11 U.S.C.S. §544(bl , deprived trustee of ~tanjing :;0 assert ~ clainl for aiding end cbetting a fraudulent transfer.
OUTCOMe: The Bankruptcy Code barred trustee's fraudulent transfer action. The transaction
~here debto~
sold defendant a treasury
bill after ilgceeln9 Co repurchasl:' th~ bill came wit.hit; the Bankrupr.q.' Cooe'!; definit.1on of sett]em~nt pa}"ment. Even If Knew that ~n~ ~ransactio" wa~ ~art of Q ie~eraged buyout, no reccvery was possible b~cause the Bankruptcy Cede barred pa~~ent recovery one year po~:-petition.
d~fendant se~tlemenl
CORE TERMS: repo, settlement payment, stockbroker, commodity, broker, aiding and abetting, shareholder, transferred, settlement, fraudulent conveyance, summary judgment, handling, fraudulent transfer, stock, forward contract, clearing, merchant, reverse repurchase agreement, repurchase agreement, present action, prepetition, undisputed. repurchase. buy. dealer, chain, legislative history, cause of action, insolvent, defraud LexisNexis(R) Headnotes .. Hide Headnotes Civil Procedure> Summary Judgment:> Standards:> Legal Entitlement
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911 8/2006 I I :00 AM
LeXlsNexls oy c.rean Lara - uocunu:m
Civil Procedure> Summary Judgment> Standards> Materiality HN1Summary judgment lS properly ± Judgment as a matter uf laM.
granted when there is no genulne issue of mater1al
f~ct
and the moving party is
entJ~led
La
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN2 See the Bankruptcr Code.
±
11 U.S.C.S, § 546 (e) .
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power 11 U,S.C.S. § 546 (e). to protect thl;< nau.on' 5 financial markets from the instability caused by the reversal of settled securitles transact lOriS .
HN3 Congress enacted Bankruptcy Code,
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN4 Repos and Reverse Repos are securities transactions covered by Bankruptcy Code.
11 U.S.C.S § 546 (e) .
! Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power
=
a Repo arrangement, the dealer sell~ specified 5ecuritle~ to purchaser, but also agrees to repurchase the securi~ies later at the original price, plus an agreed upon additional amount usually representing interest on the original pu~chase price. A Reverse Repo basically is the reverse: the dealer buys securIties and agrees to resell the securities to the seller in the future. Reverse Repos can function as a loan. The seller receives cash for the securities, but must repurchase the securities in the future at the same price. Thus. the securities sold to the dealer can be viewed as being colla~eral far a loan.
HN51n
+
~
Bankruptcy LaW> Case Administration> Examiners. Officers & Trustees> Limitations on Trustee's Power HN6 Whether a transaction is
±
a Repo or Reverse Repo covered under BanJ:ruptcy Code, 11 U.S.C.S. § 546 Ie l, is
HI
be governed by an
objective test.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN7 Severa 1 courts have also held tha t
±
Bankruptcy Code, 11 V.S.C_S. § 546 (e ~,
cover~
unusual as well as rou tine securities
t ransa C"tions.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Umitations on Trustee's Power 11 U.S.C.S.&546(e), does not caver only Repcs and Reverse Repos; it covers all types of secu::-ities transactions. The Bankruptcy Code, 11 U.S.C.S. § 546 (e), includes ;: transfer of securities that completes any securities t ransa etion.
HNBThe Bankruptcy Code,
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power Bankruptcy Law> Liquidations> Clearing Banks, Commodity Brokers & Stockbrokers HN9 See the BanKruptcy Code,
±
11 U.S.C.S. § 741 (8) .
Bankruptcy Law> Case Administration> Examiners. Officers & Trustees> Limitations on Trustee's Power HN20A settlemen~ payment clearly includes
±
a transfer of securities that completes a securities trans3ctlOr..
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN21Settlement payment includes any transfer of cash or securities toward completion of a securities transaction.
±
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN12 See the Sankruptq Code.
±
11 U.S.C.S. § 546 (f1 .
Bankruptcy Law> Case Administration> Commencement> General Overview HN13 See the Eankruptcy Code,
±
11 U.S.C.S. § 101 (4Ill.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Limitations on Trustee's Power HN14Thf' Bankruptcy Code ICode), 11U.S.C.S §546(f), wa!O int.ended to supplement rather than narrow Code, 11U.S.C,S.§546Ie), and a defendont thc;!. qualifies under Code, 11U.S,C.S.§546(el, as i":. 5toc~.broker need not quality under Cede, 11U.S,C.S.G546(fl. as a
±
repc participant.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> Constructively Fraudulent Transfers Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> Elements Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers'> Intent 11 U_S.C.S, § 546 (e}, cont.ains c; limite~ el".cep~ion fo:- cases lnvolv.lnr;Y actual fraUd. Ttl", st.atute does nDt b"r actious brOl:aht under the Bankruptcy Code, 11 U.S.C.S, § 548 (a) {i I, which allows", trustee tu recover c transfer mad(; wi thH, Dne year before the petitlon :late with actual intent to hInder, delaj'. or defraud cre::iitc's. The Ban!;ruptq' Code, 11 U.S.C.S. §
HU15Thf' Bankruptcy Code,
..,
~,
546 (e), does ba::::- actions brought under the Bankruptcy Code, "U.S.C S. § 544 (using state fraudulent com/eyance statutes) ttl reccve:- transfers made mere that; cn(! year prepetitiClJ ...itr, actucl int~nt tt: hinde:, delay, Dr :Jt'fraud cn:dirors.
20f9
9/1812006 1 1:00 AM
LexisNexJs by Cre<1lt Card - uocument
nttp:11 Wt:::O.It:X.l~.l;UIIll Jll,;IItl.lJ~t:1 ~CC1.ll.,;l1JUI~l-'UU'- .i:C) .... : _ y,:,u llIb-V"t~U1 .•.
Bankruptcy Law> Bankruptcy Crimes HN16Californi2 courts per~it c credltor to hinder, oelay, or defraud credltOrs.
±
r~cover
civii
damage~
from those who conspire to transfer property of a debtor to
Bankruptcy Law> Bankruptcy Crimes Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Real Property Law> Purchase & Sale> Fraudulent Transfers HN17A debtor's banr.ruptcy trustee is not authorized to pursue every
±
ac~ion
that credirors of
th~
debtor might pursue.
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Voidable Transfers> Unsecured Creditors Bankruptcy Law> Claims> Allowance HN1.8 See
±
the Bankruptcy Code, 11 U.S.C.S. § 544 (bl .
Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Duties & Functions> Reorganizations Bankruptcy Law> Case Administration> Examiners, Officers & Trustees> Fraudulent Transfers> General Overview Estate, Gift & Trust Law> Trusts> Trustees> Duties & Powers> General Overview
±
trusLee's pDwer to avoid fraudulent trDnsfers does not enable a trusLee to recover damages for aiding and abetting c fraudulent transfer.
HN19A
COUNSEL: [-1] J. Michael Kelly, Esq., COOLEY GODWARD CASTRO, San Francisco, CA, OF COUNSEL. Thomas K. Potter, Ill. Esq., JONES, WALKER, WAECHTER, POITEVENT, CARRERE & DENEGRE, New Orleans, LA, Counsel for Defendants, Howard, Weil, LaBouisse, Friedrichs Incorporated; Howard WeiI Financial Corporation; and Legg Mason, Inc. L.J. Chris Martiniak, Esq., FELDMAN, WALDMAN & KLINE, San Francisco, CA, Counsel for Plaintiff, Frederick S. Wyle, Trustee. JUDGES: Thomas E. Carlson, United States Bankruptcy Judge
OPINION BY: Thomas E. Carlson OPINION: [·897] OPINION Thomas E. Carlson, Bankruptcy JUdge. The principal question in this case is whether section 546(e) of the Bankruptcy Code bars a trustee from recovering as a fraudulent conveyance transfers made by a stockbroker pursuant to a reverse repurchase agreement used to facilitate a leveraged buyout. I conclude that there are no genuine issues of material fact and that section 546(e) bars trustee's action, and therefore grant summary judgment for defendant.
FACTS The material facts are not in dispute. On December 3D, 1987, MaxPhanna, Inc. paid Connecticut General Corporation (CIGNA) $ 500,000 for an option entitling it to purchase stock of Debtor Hamilton Taft & Company [....2] (Debtor) from CIGNA for $ 4,100,000. MaxPharma could exercise the option only through January 29,1988. The $ 500,000 option price was applicable to the purchase price, but was otherwise non-refundable. MaxPharma was unable to find a lender willing to arrange financing through a "stock loan," whereby Debtor's stock would be used as collateral to secure the loan. Defendant Howard, Weil, Labouisse, Friedrichs Incorporated (Defendant) informed MaxPharma that it did not make "stock loans," but could lend money with a treasury hill as security by performing a reverse repurchase transaction. On January 28, 1988, Debtor wired $ 5.0 million to Defendant. On January 29, 1988, Defendant used approximately $ 4.9 million of those funds to purchase for Debtor a gO-day T-Bill having a face value of $ 5.0 million. On the same day, Debtor sold the T-Bill back to Defendant for $ 4.1 million, subject to a reverse repurchase agreement, under which Debtor agreed to repurchase the T-Sill in 90 days for the sale price plus interest. What happened to the $ 4.1 million is contested by the parties. Debtor's chapter 11 trustee (Trustee) contends that the $ 4.1 million was transferred directly to MaxPharrna immediately [**3] upon sale of the T-Bill. Defendant claims that it credited Debtor's account for $ 4.1 million, and that those funds were subsequently wired to MaxPharma. For the purpose of the present motion, I accept Trustee's version of the facts. It is undisputed that Debtor transferred the funds to MaxPharma at the request of Debtor and that MaxPharma used $ 3.6 million to purchase Debtor's stock from CIGNA. When the 90-day repurchase agreement matured, Debtor rolled over its obligation into new T-Bills and later into T-Notes. In
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II
up ,/ / WCU. Jt:'A.l~ .I.,;UUI/ )l.l;lJ(UJ ~t:'/l)t:'aJ I,;J 1/ W::l PUUl,; .il:)P : _4.;:) U lJJg-l}'+JU...)u J •••
January 1989, Debtor directed Defendant to sell the T-Notes and apply the proceeds to satisfy uebtor's obligation under the reverse repurchase agreement. Creditors filed an involuntary chapter 11 petition against Debtor on March 20, 1992. Trustee was appointed on March 26. 1992. An order for relief was entered on May 31,1992. Trustee filed the present action on March 26, 1993. ~e contends that the transaction involving Debtor. Defendant, and MaxPharrna was in substance a leveraged buyout (LBO), in which MaxPharma used Debtor's funds to_purchase CIGNA's stock in Debtor. Trustee further contends that the transaction rendered Debtor insolvent-and that the LBO therefore r4] constituted a fraudulent conveyance. In the present action, Trustee seeks to recover, pursuant to California Civil Code sections 3439.04 and 3439.05 and Bankruptcy Code section 544, the value of the $ 5.0 million T-Bill transferred from Debtor to Defendant on January 29, 1988, or the $ 4.1 million proceeds of the sale of that T-Bill that were transferred from Defendant to MaxPharma the same [*'898] day. n1 Trustee and Defendant filed cross motions for summary judgment. - - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n1 Trustee previously filed a similar action against CIGNA. That action was settled by the parties before trial.
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DISCUSSION
Standard for SummaI)' Judgment HNl+"Summary judgment is properly granted when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau. Inc.. 690 F.2d 1240.1250 (9th Cir. 1982), cert. denied, 459 U.S. 1227. 75 L. Ed. 2d 468. 103 S. Ct. 1234 (1983). [....5]
II Section 546(e) Defense Defendant contends that Trustee's action is barred under section 546(e) of the Bankruptcy Code. That section provides:
HNZ.notwithstanding sections 544, 545, 547, 548(a}(2), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101(34),741(5), or 761(15) of this title, or 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 fnstitution, 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). HN3'tCongress enacted section 546(e) "to protect the nation's financial markets from the instability caused by the reversal of settled securities transactions." Kaiser Steel Resources. Inc. v. Jacobs. 110 BankL 514, 522 (D. Colo. 1990). affd, 913 F.2d 846 (10th CiL 1990) (citation omitted). Trustee does not contest many of the elements of the section 546(e) defense: that Defendant is a stockbroker, that the [**6] T-Bill transferred was a security, and that the present action is brought under section 544. Trustee contends that section 546(e) does not apply. however, because: (i) the transaction was not a true repurchase agreement (Repo). (ii) the transfer of the T-Bill to Defendant was not a "settlement payment," (iii) the present transaction is governed by section 546(f}. and (iv) section 546(e) should not be applied to LBOs.
A. Whether Transaction a True Repo
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Defendant characterizes its transaction with Debtor as a reverse repurchase agreement (Reverse Repo). HN~The Ninth Circuit has held that Repos and Reverse Repos are securities transactions covered by section 546(e). In re Comark. 971 F.2d 322. 325 (9th Cir. 1992) (Comark I); In re Comark. 145 Bankr. 47, 52-53 (Bankr. 9th Cir. 1992) (Comar\< II). HNS'tThe Ninth Circuit has described the characteristics of Repos and Reverse Repos as follows. In a Repo arrangement, the dealer sells specified securities to a purchaser, but also agrees to repurchase the securities later at the original price, plus an agreed upon additional amount usually representing interest on the original [**7] purchase price. A Reverse Repo basically is the reverse: the dealer buys securities and agrees to resell the securities to the seller in the future. Reverse Repos can function as a loan. The seller receives cash for the securities, 'but must repurchase the securities in the future at the same price. Thus. the securities "sold" to the dealer can be viewed as being collateral for a loan.
Comarlc l, 971 F.2d at 323 (footnote omitted). Accord 11 U.S.C. § 101(47). Trustee contends that the transaction between Defendant and Debtor was not a true Reverse Repo, but rather was a sham used to conceaTthe fact that Debtor's funt~s were being used to fund an LBO. Trustee notes that Debtor used $ 5.0 rnlmon cash-tobuya-T-=Biil,-the'r;Tmmedialely sold the T-Bill subject to the Reverse Repo, leaving itself essentially in the place it started. Because there was no net borrowing of funds, which is the essential characteristic of a Reverse Repo, Trustee argues, the transaction is not entitled to protection under section 546(e). This argument is unpersuasive. [*899] First, the transaction constituted a Reverse Repo in the objective sense. [-8) Debtor sold a T-Bill to Defendant and agreed to repurchase it again later for the sale price plus interest. HN6f:Whether a transaction is a Repo or Reverse Repo covered under section 546(e) is to be governed by an objective test. See Comark II, 145 Bankr. at 53. Courts have noted that there are several varieties of genuine Repo transactions. See Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Sav. & Loan Ass'n, 878 F.2d 742,746 (3rd Cir. 1989); Comark II, 145 Bankr. at 50 n.6. HN7+Several courts have also held that section 546(e) covers unusual as well as routine securities transactions. See Comark I. 971 F.2d at 326; Kaiser Steel Corp. V. Charles Schwab & Co.! Inc.! 913 F.2d 846.849 n.6 (10th Cir. 1990) (Kaiser I); In re Kaiser Steel Corp.! 952 F.2d 1230. 1238-40 (10th CiL 1990), cert. denied, 120 L. Ed. 2d 887,112 S. Ct. 3015 (1992) (Kaiser II). Second, whether or not it was a conventional Reverse Repo, the transaction between Defendant and Debtor [-9] was clearly a securities transaction. Section 546(e) HNBidoes not cover only Repos and Reverse Repos; it covers all types of securities transactions. "Section 546(e) ... includes a transfer of securities that completes any securities transaction." Comark 1/, 145 Bankr. at 52. The transaction between Debtor and Defendant in substance reduces to the following. Debtor purchased a T-Bill from Defendant then sold it back to Defendant. Whatever else it was, this transaction was a transfer of securities. See Kaiser II. 952 F.2d at 1239-40 (transfer of securities that is part of LBO is a securities transaction covered by section 546(e».
B. Whether Transfer a "Settlement Paymenf' Trustee argues that the transfers involving Defendant are not protected under section 546(e) because they do not constitute settlement payments. "Settlement payment" is defined in section 741 (8) of the Bankruptcy Code. HN9+"Settlement payment" means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account.. a final settlement payment, or any other similar payment commonly used in L*10] the securities trade.
11 U.S.C. § 741(8). The Ninth Circuit has construed the term very broadly.
HN1C1'tWe now join with the Third and Tenth Circuits and broadly define the term settlement payment. A settlement payment clearly includes a transfer of securities that completes a securities transaction.
Comark I. 971 F.2d at 326 (citation omitted). Accord Comark II. 145 Bankr. at 52.
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was not a,.- settlement because it did not Trustee first.. argues that the initial transfer of the T-Bill to Defendant . - ,._- --- .- payment '" .. ,.... .. ~--- ~
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complete the Reverse Repo. ~his argument ,is whollY. une~~..!!.~~tve. The clear thrust of both Comark I and Comark II is that HN11 "settlement payment" includes any tr~nsfer of cash or securities toward completion of a securities transaction. See Comark I, 971 F.2d at 326; Comark II. 145 Bankr. at 52. To hold that section 546(e) does not apply to the initial transfer of securities to a broker handling a Reverse Repo would eviscerate section 546(e) and frustrate Congress's intent in enacting it, by leaving the broker open to suit [-11J for doing nothing more than handling a securities transaction for the debtor. n2
t
- - - - - - - - - - ~ - - - Footnotes - - - - - - - - - - - - - - n2 Trustee contends that Defendant's expert witness testmed that the initial transfer of the T-Bill to Defendant was not a settlement payment. This argument fails for two reasons. First, the relevant historical facts are undisputed. The application of section 546(e) to those facts is question of law, not a question of fact subject to expert testimony. See Comark l. 971 F.2d at 324-25. Second, Trustee mischaracterizes the testimony of Defendant's expert, Dr. Marcia L. Stigum. Dr. Stigum's testimony, taken as a whole, supports a finding that the initial transfer of the T-Bill was a settlement payment. Plaintiff failed to submit affidavits controverting that testimony.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - Trustee next
ar~~
that the transfer to MaxPhanna of the $ 4.1 million proceeds of the sale of the T-Bill was not a
~~~.~~Y..m~!!.t~~~.Y§~ ~t,-e..p~y.mW~-'J9l rn~cte.!qJ:)~btor, the other party to the Reverse Repo. infS"argument is
frivolous. [-12].!!.l.s ["'gOO] ~ndisput~~t!l_a!!b~.BJ.n.d.~we[e transferred to Ma,xPharma at th~.,d_i[e~_oru~f Q~~~or. In directing payment of the sale proceeds f()""MaxPharmai-Qebtor e~~rt~d dominion ()Y~f th~.f!Jnqs ~nd used th~m fqr,~.s. o~ pu.r~,q!;~,s. Thus, from the viewpoint of Defendant, payment to MaxPharma constituted payment to Defendant, and fulfilled De/en'dant's obligation under the first leg of ttie Reverse Repo. n3 - - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n3 Trustee's separate statement of undisputed facts asserts that Debtor's instructions to Defendant to transfer the proceeds to MaxPharma were not property authorized by Debtors board and were therefore ultra vires. The facts asserted by Trustee
dearly establish that the instructions were made with at least apparent authority, and that Debtor implicitly ratified the transaction after the fact. Moreover, Trustee raise no ultra vires argument in the memoranda filed in support of his motion for summaI)' judgment or in opposition to Defendant's motion for summary judgment. ~
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c. Must Defendant Satisfy Section 546(f}? Trustee [-13] argues that section 546(f) governs Repo transactions and that Defendant is not entitled to protection under that statute. Section 546(f) provides: HN12+notwithstanding sections 544, 545, 547, 548(a)(2), and 54B(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 741 (5) or 761 (15) of this title, or settlement payment, as defined in section 741 (8) of this title, made by or to a repo participant, in connection with a repurchase agreement and that is made before the commencement of the case, except under section 548(a)(1) of this title.
11 U.S.C. § 546(f). Section 101 (46) defines "repo participant" as follows:
HN1~"repo participant" means an entity that, on any day during the period beginning 90 days before the date of the filing of the petition, has an outstanding repurchase agreement with the debtor;
11 U.S.C. § 101(46). Trustee argues that section 546(f) governs, because it is the more specific statute, expressly addressing Repo transactions. Trustee argues that Defendant is not protected under section 546(f) , because any Reverse Repo transaction between [-14] Defendant and Debtor closed more than 90 days prepetition, and Defendant is therefore not a "repo participant" under section 101 (46).
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Both the statutory language and legislative history indicate that section 546(f) was intended to address Repo transactions not already covered by section 546(e) rather than to narrow the application of 546(e). Section 546(e) protects only a "commodity broker, forward contract merchant, stockbroker, financial institution. or seculities clearing agency." Section 546(f) protects additional participants in certain Repo transactions. The legislative history to section 546(1) states in relevant part: the proposed amendments are intended to afford participants in the repo market the same treatment with respect to the stay and avoidance provisions of the Code that Public Law 97-222 explicitly provided stockbrokers, securities dearing agencies, commodity brokers and forward contract merchants in connection with securities contracts, commodity contracts and forward contracts.
S. Rep. No. 65, 98th Cong., 1st Sess. 45, 49 (1983). The same legislalive history states dearly that section 546(e) continues to protect stockbrokers engaged in Repo transactions. [**15]
These amendments are not intended, however, to affect the status of repos Involving securities or involving commodities as securities contracts, commodity contracts, or forward contracts, and their consequent eligibility for similar treatment under other provisions of the Code, such as the provisions giving protection to stockbrokers, securities clearing agencies, commodity brokers, and forward contract merchants for liquidation and setoff in respect of securities contracts, commodity contracts or forward contracts.
Id. See also Comark II. 145 Bankr. at 52-53. In summary, section 546(f) HN1~twas intended to supplement rather than narrow section 546(e), and a defendant that qualifies under 546(e) as a stockbroker need not qualify under section 546(f) as a repo participant.
[*901] O. Is there an LBO Exception to Section 546(e)1 Trustee argues that 546(e) should not be interpreted to protect a stockbroker involved in a securities transaction that implements an LBO, relying on Lippi v. City Bank, 955 F.2d 599 (9th Cir. 1992), Kendall v. Sorani. 151 Bankr. 1012 (Bankr. N.D. Cal. 1993), and Wieboldt Stores Inc. v. Schottenstein, 131 Bankr. 655 (N.D. Ill. 1991). [-16] Trustee contends that this LBO exception to section 546(e) applies with special force in the present case, because Defendant knew Debtor was rendered insolvenl by the transaction. Trustee's argument is not supported by the authorities cited. Trustee's reliance on Wieboldt is misplaced. That case held that section 546(e) did not preclUde a fraudulent conveyance action against shareholders whose shares were purchased in an LBO. In the present action, Trustee seeks recovery not from former shareholders, but from a stockbroker that transferred certain securities as a part of the LBO. The Wieboldt court carefully noted that its holding did not leave the stockbroker handling the LBO open to suit. The court acknowledged that the purpose of section 546(e) was to protect brokerage finns, and then stated:
in the instant case, however, requiring the [shareholders] to return to the Trustee payments they received ... poses no significant threat to those in the clearance and settlement chain.
Wieboldt. 131 Bankr. at 664 (footnote omitted). The court also quoted with approval the following excerpt from the law review article it had preViously cited [-17] in holding that section 546(e) does not protect selling shareholders,
"Neither the system of guarantees nor the solvency of participants in the chain is threatened by a legal order in which payments to the shareholders by their brokers are subject to recovery by a trustee in bankruptcy. Thus, while the flows of funds to and between financial intermediaries in the clearance and settlement chain must be protected in order to insure the stability of those systems. funds flowing from the intermediaries to the shareholders do not require protection, and section 546(e) should therefore not apply."
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[d. at 664 n.11 (quoting Neil M. Garfinkel, Note, No Way Out: Section 546(e) Is No Escape for the Public Shareholder of a Failed LBO, 1991 Colum. Bus. L. Rev. 51. 61-63). The Tenth Circuit has held that there is no LBO exception to section 546(e). That court has applied section 546(e) to bar recovery both from the brokerage handling the transfer of shares in an LBO, see Kaiser I, and from the selling shareholders, see Kaiser II. The court noted that the plain language of section 546(e) covers LBOs as well as more conventional securities transactions {-181 and reasoned flit would be an act of judicial legislation to establish such a limitation." Kaiser to 913 F.2d
at 850. In short, only Wieboldt supports any LBO exception to section 546(e), but even that case does not permit an action against the stockbroker handling the securities transactions involved in the LBO. Trustee's reliance on Lippi and Kendall is equally misplaced. In each of those cases, the plaintiff sought recovery from the bank that financed the LBO. In neither case did section 546(e) even arguably apply, and neither opinion mentions that statute. Finally, assuming arguendo that Defendant knew the Reverse Repo was part of an LBO and that the LBO rendered Debtor insolvent, such knowledge does not bar application of section 546(e). Section 546(e) HNlstcontains a limned exception for cases involving actual fraud. The statute does not bar actions brought under section 548(a)(1) of the Bankruptcy Code, which allows a trustee to recover a transfer made within one year before the petition date with actual intent to hinder, delay, or defraud creditors. Section 546(e) does bar actions brought under section 544 (using state fraudulent conveyance [-19] statutes) to recover transfers made more than one year prepetition with actual intent to hinder, delay, or defraUd creditors. Thus, it is clear Congress intended to prohibit recovery of "settlement payments" received by stockbrokers- mare than one year prepetition, irrespective of the stockbroker's mental state. Because the transfers at issue here [-902) occurred more than one year prepetition and Trustee's action is brought under section 544, Defendant's knOWledge about the LBO and its effect on Debtor is irrelevant.
lit
Aiding And Abetting Trustee asserts that even if his action to avoid the transfers to Defendant are barred by section 546(e), he may recover damages from Defendant under state law on the theory that Defendant aided and abetted the fraudulent LBO. Trustee argues that liability for damages for aiding and abetting a fraudulent transfer is not barred by section 546(e). Defendant argues that Trustee's aiding and abetting theory fails because: (i) Trustee failed to plead it as a separate claim for relief; (ii) no such cause of action exists under California law; (iii) Trustee lacks standing to assert such a cause of action; and Ov) any such cause of action is barred by [**20] section 546(e). I determine that the Trustee lacks standing to assert the aiding and abetting daim.
a debtor to hinder, delay, or defraud creditors. See Taylorv. S & M Lamp Co., 190 Cal. Apo. 2d 700,706.12 Cal. Rptr. 323 (1961);
HNl GtCalifomia courts permit a creditor to recover civil damages from those who conspire to transfer property of
Hickson v. Thielman, 147 Cal. APD' 2d 11,15,304 P.2d 122 (1956). HN1JtAdebtor's bank~_to.:mJ~e,b.owever, is not authorized to pursue every action that creditors of the debtor might pursue. Cf. In re Ozark Restaurant Eguipmenr-C-o~:-liic.. 816 F.2d 1222~12i6~31r'{8th Cli-:),>cert.aeniea~-484U.S: 84B"n987):A1rustee's only authority to assert creditors state-law causes of action related to fraudulent conveyances is found in section 544(b) of the Bankruptcy Code. n4 That section only permits the trustee to avoid a fraudulent transfer. HN1BtThe trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable I~11 law by a creditor holding an unsecured claim that is allowable under 502 of this title or that is not allowable only under section 502(e) oflhis title.
11 U.S.C. § 544(b) (emphasis added). The Ninth Circuit has squarely held that HlVl9fa trustee's power to avoid fraudulent transfers does not enable a trustee to recover damages for aiding and abetting a fraudulent transfer. - - - - - - - - - - - - - - Footn otes - - - - - - - - - - - - - - -
n4 Section 548 of the Bankruptcy Code creates a federal cause of action for recovery of a fraudulent conveyance. Trustee cannot use section 548, however, because that statute only permits avoidance of transfers made within one year of the petition date. It is undisputed that all transfers to Defendant occurred more than one year before the bankruptcy petition was filed.
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The Act carefully speaks of conveyances of property as being "null and void," and authorizes suit by the trustee to "reclaim and recover such property or collect its value." The actions legislated against are not "prohibited"; those persons [~2] whose actions are rendered "null and void" are not made "liable"; and terms such as "damages" are not used. The legislative theory is cancellation, not the creation of liability for the consequences of a wrongful act.
Elliott v. Glushon. 390 F.2d 514, 516 (9th Cir. 1967) (footnote omitted). In short. Trustee's only authority to bring slate-law claims of creditor's is section 544(b) , and section 544(b) does not authorize Trustee to assert a claim for aiding and abetting a fraudulent transfer. CONCLUSION Bankruptcy Code section 546(e)-bars Trustee's fraudulent transfer action against Defendant Trustee lacks standing to sue Defendant for aiding and abetting a fraudulent conveyance. Accordingly, I grant summary judgment in favor of Defendant. Date: 1-18-95 Thomas E. Carlson United States Bankruptcy Judge Copyright © 2006 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. Your use of this servIce is governed by Temls & Conditions. Please review them.
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KeyClte - 176 B.R. 895 History (Showing 6 documents)
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re Hamilton Taft &. Co., 176 B.R. 895, 32 Collier Bankr.Cas.2d 1727, 26 Bankr.Ct.Dec. 665 (Bankr.N.D.Cal. Jan 19, 1995) (NO. 91-3-1077-TC, 93-3-121-TC) Affirmed by H In re Hamilton Taft & Co., 196 B.R. 532 (N.D.Cal. Oct 12, 1995) (NO. C 95-1612-51) Judgment Affirmed by PIn re Hamilton Taft & Co., 114 F.3d 991, 30 Bankr.Ct.Dec. 1236, Bankr. L. Rep. P 77,405, 97 Cal. Daily Op. Servo 4410, 97 Daily Journal D.A.R. 7369 (9th Cir.(Cal.) Jun 11, 1997) (NO. 95-17058)
Court Documents Appellate Court Documents (U.S.A.) C.A.9 Appellate Briefs IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant, v. HOWARD, Howard Weil, Labouisse, Friedrichs Incorporated, a Louisiana corporation; Howard Weil Financial Corporation, a Louisiana corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489911 (Appellate Brief) (C.A.9 Feb. 20, 1996) Opening Brief of Appellant Frederick s. Wyle, Trustee of Hamilton Taft &. Company (NO. 95-17058) IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant v. HOWARD, Weil, Labouisse, Friedrichs Incorporated, a Louisiana corporation, Howard Weil Financial Corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489913 (Appellate Brief) (C.A.9 Mar. 21, 1996) Original Brief of Defendant-Appellee Howard, Weil, Labouisse, Friendrichs, Inc. (NO. 95-17058) IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, Plaintiff-Appellant, v. Howard, Howard WElL, Labouisse, Friedrichs Incorporated, a Louisiana corporation; Howard Weil Financial Corporation, a Louisiana corporation; and Legg Mason, Inc., a Maryland corporation, Defendants-Appellees., 1996 WL 33489912 (Appellate Brief) (C.A.9 Apr. OS, 1996) Reply Brief of Appellant Frederick s. Wyle, Trustee of Hamilton Taft &. Company (NO. 95-17058) Negative Only
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Positive Cases (U.S.A.)
.1.* * *:
Discussed In re Hamilton Taft & Co., 114 F.3d 991, 992+, 30 Bankr.Ct.Dec. 1236, 1236+, Bankr. L. Rep. P 77,405, 77405+, 97 Cal. Daily Op. Servo 4410,4410+,97 Daily Journal DAR. 7369, 7369+ (9th Cir.(Cal.) Jun 11, 1997) (NO. 95-17058) " HN: 1,2,4 (B.R.)
**
Cited P 2. In re Gandy, 299 F.3d 489, 496, 48 Collier Bankr.Cas.2d 895, 895, Bankr. L. Rep. P 78,709, 78709 (5th Cir.(Tex.) Jul 22, 2002) (NO. 02-50185)
3. In re Mark Industries, Inc., 110 F.3d 69, 69 (9th Cir.(Cal.) Mar 20, 1997) (Table, text in WESTLAW,-NO. 95-55712) P4. Forum Ins. CO. V. Devere Ltd., 151 F.Supp.2d 1145, 1149 (C.D.Cal. Jan 02, 2001) (NO. CV 97-9386 NM RCX) HN: 8 (B.R.) P 5. In re Hechinger Investment Co. of Delaware, 274 B.R. 71, 98 (D.Del. Feb 20, 2002) (NO. 99-2283, CIV.A.OO-840-RRM) " HN: 5 (B.R.) H 6. In re National Forge Co., 344 B.R. 340, 371 (W.D.Pa. ]un 09, 2006) (NO. CIV.A. 04-21 ERIE) " HN: 1 (B.R.)
c 7. In re Lucas Dallas, Inc., 185 B.R. 801, B05, 34 Collier Bankr.Cas.2d 1095, 1095, 27 Bankr.Ct.Dec. 955, 955, 95 Daily Journal DAR. 12,382, 12382 (9th Cir.BAP (Cal.) Aug 17, 1995) (NO. NC-94-2055-HVR, 93-4562 AN, NC-94-2116-HVR, 91-46079 IN) " HN: 8 (B.R.) 8. ]n re Sia, 2006 WL 2472995, *12 (Bankr.D.Hawai'j Aug 25, 2006) (NO. 98-04912, ADV. 00-00102)
Secondary Sources (U.S.A.) H 9. Right of creditor to recover damages for conspiracy to defraud him of claim, 11 A.L.RAth 345, §10+ (1982) HN: 4 (B.R.)
10. s 6:12. Fraudulent conveyance attacks -- Cases, SECACQMERG 5 6:12, s 6:12+ (2006) HN: 1,5 (B.R.) 11. Bankruptcy Service Lawyers Edition s 31:254, s 31:254. Leveraged buyouts (2006) HN: 6 (B.R.) 12. Bankruptcy Service Lawyers Edition s 32:208, 13. Bankruptcy Service Lawyers Edition
5
5
32:208. Generally (2006) HN: 1,4,5 (B.R.)
32:210, s 32:210. Congressional intent (2006) HN: 1,5 (B.R.)
14, Bankruptcy Service Lawyers Edition s 32:213, s 32:213. What constitutes "settlement payment" -Particular determinations -- Reverse repo's (2006) HN: 1,5 (B.R.)
c
15. CJS Conspiracy
5
49, s 49. Defrauding creditors (2006) HN: 7 (B.R.)
c 16. DERIVATIVES AND REHYPOTHECATION FAILURE: IT'S 3 :00 P.M., DO YOU KNOW WHERE YOUR COLLATERAL IS?, 39 Ariz. L. Rev. 949, 1001 (1997)
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c 17. LEVERAGED BUYOUTS AND FRAUDULENT CONVEYANCES: YET ANOTHER Ln.JDATE, 7 J. Bankr. L. & Prac. 315, 333 (1998) HN: 6 (B.R.) c: 18. FORWARD CONTRACTS, BANKRUPTCY SAFE HARBORS AND THE ELECTRICITY INDUSTRY, 51 Wayne L. Rev. 49, 106 (2005) HN: 3 (B.R.) 19. ACQUISITION FINANCING, 754 PU/Comm 385, 449 (1997) HN: 1,5 (B.R.) 20. ACQUISITION FINANCING, 739 PLI/Comm 367, 427 (1996) HN: 1,5 (B.R.) 21. SPECIAL BANKRUPTCY CODE PROTECTIONS FOR DERIVATIVE AND OTHER CAPITAL MARKET TRANSACTIONS, 721 PU/Comm 95, 114 (1995) HN: 1,5,6 (B.R.)
22. SECURITIES, FORWARD AND COMMODITY CONTRACTS AND REPURCHASE AND SWAP AGREEMENTS UNDER U.S. INSOLVENCY LAWS, 721 PLl/Comm 401, 410+ (1995) HN: 1,2,4 (B.R.)
Court Documents Appellate Court Documents (U.S.A.) Appellate Petitions, Motions and Filings . 2.3. Wyatt R. HASKELL, Petitioner, v. PWSHOLDING CORPORATION, Bruno's Inc., Foodmax of Mississippi, Inc., A.F. Stores Inc., Br Air, Inc., Foodmax of Georgia, Inc., Foodmax of Tennessee, Inc., Foodmax Inc., Lakeshore Foods, Inc., Bruno's Food Stores, Inc., Georgia Sales Company, SSS Enterprise, Inc., Respondents., 2003 WL 21698608, *21698608+ (Appellate Petition, Motion and Filing) (U.S. Jan 29, 2003) Petition for Writ of Certiorari (NO. 02-1134) *: HN: 6 (B.R.)
*
Appellate Briefs 24. In re: PWS HOLDING CORPORATION, BRUNO'S, INC., Food Max of Mississippi, Inc., A.F. Stores, Inc., Br Air, Inc., Food Max of Georgia, Inc., Food Max of Tennessee, Inc., Food Max, Inc., Lakeshore Foods, Inc., Bruno's Food Stores, Inc., Georgia Sales Company, and SSS Enterprise, Inc., Debtors, Wyatt R. HASKELL, Appellant., 2001 WL 34095042, *34095042+ (Appellate Brief) (3rd Cir. Aug 28, 2001) Brief of Appellant (NO. 01-1462) HN: 6 (B.R.)
**
25. In The Matter Of: Joe Alvin ANDREWS, Sr., Debtor. CADLE COMPANY, Appellant, v. WHATABURGER OF ALICE, INC.; M. Louise Andrews; Kathy A. Reese; George P. Braun; Herbert E. Pounds, Jr.; Joe Alvin Andrews, Jr.; Michael Boudloche; Joe Alvin Andrews, Sr., Appellees., 2001 WL 34353904, *34353904+ (Appellate Brief) (5th Cir. Nov 07, 2001) Appellant's Brief (NO. 01-40807) • • HN: 3 (B.R.) 26. THE CADLE COMPANY, Plaintiff-Appellant, v. WHATABURGER OF ALICE, INC.; M. Louise Andrews; Kathy A. Reese; Herbert E. Pounds, Jr.; George P. BraLIn; and Joe Alvin Andrews, Jr., Defendants-Appellees., 1998 WL 34114582, *34114582+ (Appellate Brief) (5th Cir. Jul 09, 1998) Brief of Appellant (NO. 98-50368) *: HN: 6 (B.R.)
*
27. FORUM INSURANCE COMPANY, Plaintiff/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; Otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL 32120536, *32120536+ (Appellate Brief) (9th Cir. Aug 20, 2002) Reply Brief of Appellant Forum Insurance Company (NO. 02-55053) y
*-;:
2B. FORUM INSURANCE COMPANY, Petitioner/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; Otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL 32120535, *32120535+ (Appellate Brief) (9th Cir. Jul 20, 2002) Brief of Appellee Jerome Eglin (NO. 02-55053)
"* * *:
29. FORUfv1 INSURANCE COMPANY, Plaintiff/Appellant, v. DEVERE LIMITED; Harrington Trust Limited, As Trustee for the Ogaps Trust; Ephraim P. Kranitz; Thomas Comparet; Kranitz Comparet & Sarrow, P.c.; Jerome Eglin; Ayk, Inc.; otw Investments; and Jeja Investments, Defendants/Appellees., 2002 WL
20f4
9/1412006 J0:52 AM
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UUl-'.I/""'.CUJU•• 4.1 u.Wl::::suavv."",USSIJn.. t;;y"--'llt...IJ.-,It,,,lClU.j..VfJ;
c1U"U'~:JPU'IU-J
u... .•.
32120534, *32120534+ (Appellate Brief) (9th Cir. Jun 11, 2002) Brief of Appellant Forum Insurance Company (NO. 02-55053)
***
30. Robert B. BURNS, Plaintiff-Appellant, v. James BALDWIN, et aI., Defendants-Appellees., 2002 WL 32116680, *32116680+ (Appellate Brief) (9th Cir. May 30, 2002) Appellant's Opening Brief (NO. 02-55116) ,., • • HN: 6,7 (B.R.) 31. In re THRIFTY OIL CO., a California Corporation; Golden West Refining Company, a California Corporation; Cluj Distribution Company, a California, Corporation; Benzin Supply Company, a California Corporation; and Golden West Distribution Company, a California Corporation, Debtors, THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIONAL TRUST & Savings Association, Appellee., 2000 WL 33981185, *33981185+ (Appellate Brief) (9th Cir. Dec 18, 2000) Appellant's Reply Brief (NO. 00-56159) HN: 2,4 (B.R.)
*" *
32. In re: THRIFTY OIL CO., a California corporation; Golden West Refining Company, a California corporation; ClUj Distribution Company, a California corporation; Benzin Supply Company, a corporation; and Golden West Distribution Company, a California corporation, Debtors. THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIOI\lAL TRUST & SAVINGS ASSOCIATIOI\l, Appellee" 2000 WL 33978038, *33978038+ (Appellate Brief) (9th Cir. Nov 15, 2000) Appellee's Brief (NO. 00-56159) " HN: 2,4,5 (B.R.)
* **
33. In re: THRIFTY OIL CO., a California corporation; Golden West Refining Company, a California corporation; CLUJ Distribution Company, a California corporation; Benzin Supply Company, a corporation; and Golden West Distribution Company, a California corporation, Debtors. THRIFTY OIL CO., Appellant, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, Appellee., 2000 WL 34017800, *34017800+ (Appellate Brief) (9th Cir. Nov 14, 2000) Appellee's Brief (NO. 00-56159) " HN: 1,2,5 (B.R.)
* * "* *
34. IN RE HAMILTON TAFT & COMPANY, Debtor. Frederick S. Wyle, Trustee of Hamilton Taft & Company, PlaintIff-Appellant v. HOWARD, Well, Labouisse, Friedrichs Incorporated, a Louisiana corporation, Howard Weil Financial Corporation; and Legg Mason, Inc" a Maryland corporation, Defendants-Appellees., 1996 WL 33489913, *33489913+ (Appellate Brief) (9th Cir. Mar 21, 1996) Original Brief of Defendant-Appellee Howard, ... (NO. 95-17058) HN: 4 (B.R.)
,,* * *
Trial Court Documents (U.S.A.) Trial Motions, Memoranda and Affidavits 35. Diane MANN, as Trustee for the Estate of LeapSource, Inc.; Christine V. Kirk; Thomas F. Gilman; Indu Gupta; Kimberly C. Hartmann; Julie B. McCollum; Kelly A. Powers; Bobby D. Scott; and Patricie E. Walker, Plaintiffs, v. GTCR GOLDER RAUNER, L.L.c.; a Delaware limited liability company; GTCR Fund VI, L.P., a Delaware limited partnership; GTCR VI Executive Fund, L.P, a Delaware limited partnership; GTCR Associates VI, a Delaware general partnership; Michael Makings;, 2006 WL 1183016, *1183016 (Trial Motion, Memorandum and Affidavit) (D.Ariz. Mar 10, 2006) Motion for Summary Judgment on (1) Contract ••• (NO. CIV-02-2099-PHX-RCB)
*
36. Robert B. BURNS, Plaintiff, v. James P. BALDWIN, et ai" Defendants., 2000 WL 34631826, *34631826+ (Trial Motion, Memorandum and Affidavit) (CD.Cal. Sep 11, 2000) Plaintiff's Memorandum of Points and Authorities .•. (NO. SACVOO-0249AHS, ANX) *:
*
37. IN RE: 3DFX INTERACTIVE, INC., a California corporation, Debtor, Ein: 77-0390421 Carlyle Fortran Trust, a Maryland real estate investment trust, Plaintiff, v. NVIDIA CORPORATION, a Delaware corporation; Nvidia Us Investment Company, f/k/a Titan Acquisition Corp. No.2, a Delaware corporation; 3dfx Interactive, Inc., a California corporation, Jen-Hsun Huang, an individual; James C Gaither, an indiVidual; A. Brooke Seawell, an individual; William J. Miller" 2005 WL 2868911, *2868911+ (Trial Motion, Memorandum and Affidavit) (N.D.Cal. Oct 17, 2005) Opposition of Carlyle Fortran Trust to 3dfx ••. (NO. 05-00427JW) • • 38. In re: P.R.T.C., INC, Braunstein International Corporation, Debtors, Gregory A. Akers, Trustee, and Harold S. Taxel, Trustee, Plaintiffs, v. David Troy Braunstein, Christina Braunstein, Braunstein De Mexico,
3 of 4
9/14/2006 10:52 AM
http://creollcard,west!aw,com!K.eycne/Derault.Wl'!autoresponct= Y& ...
KeyCile Result
S.A. De C.V., BIC Technologies, Inc., Solution Technology Group, LLC, Solution Technology De Mexico, Almacen De Computadoras, Rosenbaum & Diehl, a Professional Corporation, Keith A. Rosenbaum, Duckor, Spradling, & Metzger, a Professional Corporation, and, 2002 WL 32955064, *32955064 (Trial Motion, Memorandum and Affidavit) (S.D.Cal. Jan 02, 2002) Memorandum of Points and Authorit:ies in Support a •• (1\10. OOCV2307-H, JFS) *:
"*
39. In Re: ENRON CORP., et aI., Debtors. Enron Corp., Plaintiff, v. J.P. Morgan Securities, Inc., et al., Defendants. Enron Corp., Plaintiff, v. Mass Mutual Life Insurance Co., et aI., Defendants., 2005 WL 3038836, *3038836+ (Trial Motion, Memorandum and Affidavit) (S.D.N.Y. Aug 01, 2005) Memorandum of Law in Support of Lehman's Motion ••• (NO. 01-16034, AJG) HN: 1,3 (B.R.)
**
40. GREAT AMERICAN UFE INSURANCE COMPANY, Plaintiff, v. Katharine Shaw Wallace THOMPSON, Defendant., 2006 WL 1442021, *1442021 (Trial Motion, Memorandum and Affidavit) (S.D.Ohio Apr 25, 2006) Reply in Support of Plaintiff1s Emergency Motion ••• (NO. 104CV815)
**
41. In re: John SASSER, Debtor; In re Mayflower Transit, LLC, Plaintiff, v. John Sasser, Defendant., 2002 WL 32931587, *32931587 (Trial Motion, Memorandum and Affidavit) (Bankr.E.D.Cal. Jun 03, 2002) Reply to Opposition of Chapter 7 Trustee1s ••• (NO. 02-10300A-11)
**
Full History
re)
I Negative
Only
2006 West I Accessibility Information
THOIVISON
*'
VVEST
40f4
9/14/2006 10:52 AM
William J. Perlstein (WP 1073) Craig Goldblatt (CO 6793) Jonathan E. Paikin (JP 7599) Caroline Rogus (CR 6931)
WIL1v£ER CUTI..ER PICKERING LLP 2445 M Stree~ N.W. Washington, DC 20037 Telephone: (202) 663-6000 Facsimile: (202) 663-6363 Attorneys for Amici Curiae International Swaps and Derivatives Association, Inc., Securities Industry Association, and The Bond Market Association
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK .~-----------------------------------------------------------x
In re
Chapter 11 Case No. 01-16034 (AJG)
ENRON CORP., et al., Jointly Administered
Debtors.
------------------------------------------------------------- x Adv. No. 03-93383 (AjG)
ENRON CORP., Plaintiff,
v. LEHMAN BROTHERS FINANCE SA., et at, Defendants.
------------------------------------------------._--_.------- x MEMORANDUM OF LAW OF INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIAnON, INC., SECURITIES INDUSTRY ASSOCIATION, AND TIlE BOND MARKET ASSOCIATION AS AMICUS CURIAE IN SUPPORT OF DISMISSAL OF ADVERSARY PROCEEDING
TABLE OF CONTENTS Page
ii
TABLE OF AUTHORITffiS PRELIl\1IN'ARY STATEMENT
_
1
STATEMENT OF INTEREST
3
STATUTORY, FACTUAL AND PROCEDURAL BACKGROUND
5
I.
SECTION 546(e) PROTECTS PAYMENTS MADE UNDER OTC EQUITY DERIVATIVES CONTRACTS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
A.
B. II.
m.
13
The Transfers Are Protected "Settlement Payments" In The Forward Contracts Trade
14
The Transfers Are Protected "Settlement Payments" In The Securities Trade
16
SECTION 546(g) PROTECTS PAYMENTS MADE IN CONNECTION WITH OTC DERIVATIVES TRANSACTIONS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
18
5TATE LAW CLAIMS THAT CIRCUMVENT THE PROTECTIONS AFFORDED TO THE FINANCIAL MARKETS BY TIlE FEDERAL BANKRUPTCY LA W5 ARE PREEMPTED
23
CONCLUSION
27
TABLE OF AUTHORITIES
CASES Page(s) Bessette v. Avco Financial Services. Inc., 230 F.3d 439 (lst Cir. 2000)
25
Bevill. Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Crr. 1989)
7,8,9, 17
Century Glove. Inc. v. Iselin (In re Century Glove), 151 B.R. 327 (Bankr. D. Del. 1993)
25
Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992)
25
Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th CiT. 2001)
25
Curtin v. Port Authority, 183 F. SUpPa 2d 664 (S.D.N.Y. 2002)
24
Diamante v. Solomon & Solomon, P.C., No. I:99CVI339 (FJSIDRH), 2001 WL 1217226 (N.D.N.Y. Sept. 18, 2001)
26
In re Comark, 971 F.2d 322 (9th Crr. 1992)
17
In re Hamilton Taft & Co., 176 B.R. 895 (Bankr. N.D. Cal.), aff'd, 196 B.R. 532 (N.D. Cal. 1995), affd, 114 F.3d 991 (9th Cir. 1997) In re Hechinger Investment Co. of Delaware, 274 B.R. 71
CD. Del. 2002)
In re Interbulk, Ltd., 240 B.R. 195 (Banlcr. S.D.N.Y. 1999)
17, 18 16, 17, 24-25, 26 9,20
In re Nation, 236 B.R. 150 (S.D.N.Y. 1999)
24
In re Olympic Natural Gas Co., 294 F.3d 737 (5th CiT. 2002)
14
In re Resorts International, Inc., 181 F.3d 505 (3d Cir. 1999)
17
International Shoe Co. v. Pinkus, 278 U.S. 261 (1929)
24
Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846 (lOth Cir. 1990)
7, 17, 18
Kaiser Steel Corp. v. Pearl Brewing Co., 952 F.2d 1230 (lOth Crr. 1991)
17
MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996)
25
Penn Terra Ltd. v. Department of Environmental Resources, 733 F.2d 267 (3d Cir. 1984)
25
Pereira v. First North American National Bank, 223 B.R. 28 (N.D. Ga. 1998)
25
ii
PertusD v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000)
Thrifty Oil Co. v. Bank of America National Trust & Savings Ass'n, 322 F.3d 1039 (9th Crr. 2003)
25-26
9, 10
SEC NO~ACTION LETTERS Chicago Rd. Options Exchange, SEC No-Action Letter, Fed. Sec. L. Rep.' 79,665 (Feb. 22, 1991)
20, 21
Goldman. Sachs & Co., SEC No-Action Letter, 2003 WL 22358822 (Oct. 9, 2003)
20
Goldman, Sachs & Co., SEC No-Action Letter, 1999 wr,-I2440I8 (Dec. 20, 1999)
20
STATUTES 7 U.S.C. § Ia(4)
15
11 U.S.C. § 101(25)
14, 15, 16
11 U.S.C. § IOl(5IA)
14
11 U.S.C. § 10I(53B)
passim
11 U.S.C. § 546(e)
passim
II U.S.C. § 546(g)
passim
11 U.S.C. § 547
5
11 U.S.C. § 548
5
11 U.S.C. § 548(a)(1)(A)
13
11 U.S.C. § 550
5
11 U.S.C. § 741(8) 11 U.S.C. § 761(8)
17 _
15
15 U.S.C. § 78 et seq
6, 22
III
1982 Amendments to Bankruptcy Code, Pub. L. No. 97-222, 96 Stat. 235 1984 Amendments to Bankruptcy
Code~
7, l3
Pub. L. No. 98-353, 98 Stat. 2706
9
1990 Bankruptcy: Swap Agreements and Forward Contracts, Pub. L. No. 101311,104 Stat. 267
11
Commodity Futures Modernization Act of2ooo, Pub. L. No. 106-554,114 Stat. 2763
21-22
LEGISLATIVE MATERIALS H.R. Rep. No. 97-420 (1982), available a11982 WL 25042
H.R. Rep. No. 101-484 (1990), available at 1990 WL 92539
7, 13,16 passim
S. Rep. No. 98-65 (1983)
8, 9
S. Rep. No. 101-285 (1990), available at 1990 WL 259288
passim
Bankruptcy Treatment ofSwap Agreements and Forward Contracts: Hearing on H.R. 2057 and B.R. 1754 Before the Subcommittee on Economic and Commercial Law of the House Committee on the Judiciary, 101st Congo 1 (1990)
6
Financial Contract Netting Improvement Act of 2001, H.R. 11, 107tll Congo (2001) Interest Swap: Hearing on S. 396 Before the Subcommittee on Courts and Administrative Practices ofthe Senate Convnittee on the Judiciary, 10 1st Congo 1 (1989)
22
lO~
11, 19
136 Congo Rec. S7535 (1990)
6, 12
136 Congo Rec. S7536 (1990)
11, 18
:MISCELLANEOUS 2000 Enron Corp. 10-K. available at http://www.sec.gov/Archives/edgar/data/I02440l/000102440101500010/ OOOl024401-01-500010.txt
12
Collier on Bankruptcy t]i 560.02 (15th ed. 2003)
20
iv
William J. Perlstein (WP 1073) Craig Goldblatt (CG 6793) Jonathan E. Paikin (JP 7599) Caroline Rogus (CR 6931) WILMER CUTLER PICKERING HALE AND DORR LLP 2445 M Street, N.W. Washington, DC 20037 Telephone: (202) 663-6000 Facsimile: (202) 663-6363
Attorneys for Amici Curiae International Swaps and Derivatives Association, Inc., Securities Industry Association, and The Bond Market Association UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ~---~---------------------------------~---~----------------~~x
Chapter 11 Case No. 01..16034 (AJG)
In re ENRON CORP., et ala,
Jointly Administered Debtors. ~------~---------------------------------------~---~..-------
ENRON CORP.,
x
Plaintiff,
Adv. Pro. No. 03-93373 (AJG)
v. UBSAG
and UBS SECURITIES LLC, flk/a UBS WARBURG LLC (a/k/a UBS WARBURG), Defendants.
------------------------------------------------------------- x MEMORANDUM OF LAW OF INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIAnON, INC., SECURITIES INDUSTRY ASSOCIAnON, AND THE BOND MARKET ASSOCIATION AS AMICI CURIAE IN SUPPORT OF DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
T ABLE OF CONTENTS
Page
ii
TABLE OF AUTHORITIES PRELI1vIIN"ARy STATEMENT
_
STATEMENT OF INTEREST STATUTORY, FACTIJAL AND PROCEDURAL BACKGROUND
I.
1 2
_
5
SECTION 546(e) PROTECTS PAYMENTS MADE UNDER aTC
EQUITY DERIVATIVES CONTRACTS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS The Transfers Are Protected "Settlement Payments" In The Forward Contracts Trade
13
The Transfers Are Protected "Settlement Payments" In The Securities Trade
15
SECTION 546(g) PROTECTS PAYMENTS MADE IN CONNECTION WITH OTe DERIVATIVES TRANSACTIONS FROM PREFERENCE AND FRAUDULENT CONVEYANCE ACTIONS
17
STATE LAW CLAIMS mAT ClRCUMVENT THE PROTECTIONS AFFORDED TO TIIE FINANCIAL MARKETS BY TIlE FEDERAL B.ANKR.UPfCY LAWS ARE PREEMPTED
23
A.
B.
II.
III.
12
CONCLUSION
27
TABLE OF AUTHORITIES CASES Page(s) Bessette v. Avco Financial Sen;icest Inc., 230 F.3d 439 (lst Cir. 2000)
_
Bevill. Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Cir. 1989) Century Glove, Inc. v. Iselin (111 re Century 1993)
Glove)~
25
7,8, 16
151 B.R. 327 (Bania. D. Del. 25
Cipollone v. Liggett Group, Inc., 505 U.S. 504 (l992)
25
Cox v. Zale Delaware, Inc., 239 F.3d 910 (7th Cir. 2001)
25
Curton v. Port Authority. 183 F. Supp. 2d 664 (S.D.N.Y. 2002)
24
Diamante v. Solomon & S%mon t p.e., No. 1:99CV1339 (FJSfDRH)t 2001 WL 1217226 (N.D.N.Y. Sept. 18. 2001)
25
In re Comark. 971 F.2d 322 (9th Cir. 1992)
17
In re Hamilton Taft & Co., 176 B.R. 895 (Bankr. N.D. Cal.), affd, 196 B.R. 532 (N.D. Cal. 1995), aff'd, 114 F.3d 991 (9th Cir. 1997) In re Hechinger Investment Co. of Delaware, 274 B.R. 71 (D. Del. 2002) In re Interbulk, Ltd" 240 B.R. 195 (Bankr. S.D.N.Y. 1999)
15, 18
16-17.24, 25,26 9, 20
In re Nation, 236 B.R. 150 (S.D.N.Y. 1999)
24
In re Olympic Natural Gas Co., 294 F.3d 737 (5th CiT. 2002)
14
In re Resorts International, Inc., 181 F.3d 505 (3d CiT. 1999)
16
International Shoe Co. v. Pinkus, 278 U.S. 261 (1929)
23
Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.ld 846 (lOth CiT. 1990)
6, 16, 17
Kaiser Steel Corp. v. Pearl Brewing Co., 952 F.2d 1230 (lOth Cir. 1991)
16
MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996)
25
Penn Terra lJd. v. Department of Environmental Resources, 733 F.2d 267 (3d Cir. 1984)
24
Pereira v. First North American National Bank, 223 B.R. 28 (N.D. Ga. 1998)
25
11
PertuSD
v. Ford Nlotor Credit Co., 233 F.3d 417 (6th Cir. 2000}
Thrifty Oil Co. v. Bank of America NatiolUll Trust & Savings Ass 'n, 322 F.3d 1039 (9th Cir. 2003)
25
9
SEC NO-ACTION LETTERS Chicago Bd. Options Exchange. SEC No-Action Letter, Fed. Sec. L. Rep. i 79,665 (Feb. 22, 1991)
20
Goldman, Sachs & Co., SEC No-Action Letter, 2003 WL 22358822 (Oct. 9, 2003)
20
Goldman, Sachs & Co., SEC No-Action Letter. 1999 WL 1244018 (Dec. 20, 1999)
20
STATUTES 14
7 U.S.C. § la(4) 11 U.S.C. § 101(25)
14, 15
11 U.S.C. § IGI(5IA)
13
11 U.S.C. § 101{53B)
18, 20,21
11 U.S.C. § 546(e)
passim
il U.S.C. § 546(g)
passim
11 U.S.C. § 547
5
11 U.S.C. § 548
5, 13
11 U.S.C. § 550
5
11 U.S.C. § 741(8)
16
11 U.S.C. § 761(8)
14 6, 21
15 U.S.C. § 78 et seq
1982 Amendments
/0
Bankruptcy Code, Pub. L. No. 97-222,96 Stat. 235
iii
7, 13
• FELDMAN, WALDMAN & KLINE A Professional Corporation 2 ;ATRICIA S. MAR L.J. CHRIS MARTINIAK 3 2700 Russ Building 235 Montgomery street 4 San Francisco, CA 94104 Telephone: (415) 981-1300 5
6
Attorneys for Trustee Frederick S. Wyle
7
a
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA
10
In re
11
HAMILTON TAFT
&
COMPANY,
) )
BANKRUPTCY NO. 91-31077 LK
)
Chapter 11
)
Debtor.
12
13 14
-----------------) FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft' & Company,
15
plaintiff, 16
v. 17
18 19
20
21
22 23 24 25
26
)
CONNIE C. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.; WINTHROP REALTY COMPANY; CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESONER FINANCIAL MANAGEMENT CORPORATION; DRESDNER ENTERPRISES, INC.: DRESDNER ,PETROLEUM, INC.; H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.; KNIGHTSBRIDGE COMPANIES, INC.: and KNIGHTSBRIDGE GUARANTY COMPANY, I Defendants.
) ) )
) ) ) )
) ) ) } ) ) }
) ) ) )
) ) ) )
) ) } )
----------------}
Adversary Proceeding No.
2 ]
5 6
FELDMAN, WALDMAN & KLINE A Professional corporation PATRICIA S. MAR L.J. CHRIS MARTINIAK 2700 Russ Building 235 Montgomery street San Francisco, CA 94104 Telephone: (415) 981-1300 Attorneys for Trustee Frederick s. Wyle
7
UNITED STATES BANKRUPTCY COURT
B
NORTHERN DISTRICT OF CALIfORNIA
9
10
i' 12 1] 1.1
In re
) ) ) ) )
HAMILTON TAFT & COMPANY,
FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft & Company,
Plaintiff,
) )
9~ )
v.
17
25
CONNIE C. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.; WINTHROP REALTY COMPANY; CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESDNER FINANCIAL MANAGEMENT CORPORATION; DRESDNER ENTERPRISES, INC.; DRESDNER PETROLEUM, INC.: H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.; KNIGHTSBRIDGE COMPANIES, INC.; and KNIGHTSBRIDGE GUARANTY COMPANY, Defendants.
26
-----------------)
20 21
22 23 2.1
Adversary Proceeding
N0"Q---
CO~INT 1.
) ) )
16
J9
Chapter 11
Debtor. ---~-------------)
IS
18
BANKRUPTCY NO. 91-31077 LK
)
-
)
2.
)
3.
) )
) )
4. 5. 6.
) )
7.
)
) ) ) )
) )
)
81 tK
FOt) Recovery of Fraudulent Transfer Pursuant to 11 U.S.C. § 548 and California Civil Code § 3439 Constructive Trust Turnover of Property or the Estate Under 11 U.S.C. § 542 Injunction Conversion Breach of Fiduciary Duties Breach of Contract (II
~ J,t.M:J~K ~~
~) t1;,)/u.f/~
Plaintiff Frederick
2
s.
Wyle, Trustee, alleges as
follows:
THE PARTIES
J 4
1.
5
Plaintiff is the duly appointed and acting trustee
in this case. 2.
6
Hamilton Taft & Company, Inc.
("the Debtor")
is a
7
California corporation with its principal place of business in San
8
Francisco, California.
9
3•
Plaintiff is informed and believes and thereon
10
alleges that defendant Connie C. Armstrong, Jr.
11
the chairman and sole shareholder of the Debtor, and is a resident
12
and citizen of the State of Texas. 4.
13
("Armstrong")
is
Plaintiff is informed and believes and thereon
14
alleges that defendant The Remington Companies, Inc.
15
is a Texas corporation with its principal place of business in
16
Dallas, Texas, and is owned or controlled by, and affiliated with,
l7
Armstrong and his affiliated entities.
I
a
5.
("Remington")
Plaintiff is informed and believes and thereon
19
alleges that defendant Winthrop Realty Company ("Winthrop")
20
Texas corporation with its principal place of business in Dallas,
21
Texas, and is owned or controlled by, and affiliated with,
22
Armstrong and his affiliated entities. 6.
2]
25
Plaintiff is informed and believes and thereon
alleges that defendant CCA Holdings, Inc.
2J '!
is a
(nCCA Holdings n
)
is a
Texas corporation with its principal place of business in Dallas,
26
C~PLAINT
-2-
Texas, and is owned or controlled by, and affiliated with, 2
Ar~strong
and his affiliated entities. 7.
]
Plaintiff is informed and believes and thereon
alleges that defendant CCAJ Corporation ("CCAJ")
is a Texas
5
corporation with its principal place of business in Dallas, Texas,
6
and is owned or controlled by, and affiliated with, Armstrong and
7
his affiliated entities. 8.
B 9
Plaintiff is informed and believes and thereon
alleges that defendant Chase Development Corp.
("Chase
is a Texas corporation with its principal place oE
10
Development")
!1
business in Dallas, Texas, and is owned or controlled by, and
r2
affiliated with, Armstrong and his affiliated entities. 9.
13 1.4
15 16
17
alleges that defendant Cal-Pacific Management Corp. Pacific")
20 21
22
25
is a Texas corporation with its principal place of
affiliated with, Armstrong and his affiliated entities. 10.
Plaintiff is informed and believes and thereon
alleges that defendant Chayson Mortgage and Investment Company ("Chaysonn)
is a Texas corporation with its principal place of
business in Dallas, Texas, and is owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 11.
23
24
("Cal-
business in Dallas, Texas, and is owned or controlled by, and
18 19
Plaintiff is informed and believes and thereon
Plaintiff is informed and believes and thereon
alleges that defendant C.R. Acquisitions, Inc.
("C.R.
Acquisitions") is a Texas corporation with its principal place of
26
C[)04PLAINT
-J-
business in Dallas, Texas, and is owned or controlled by, and 2
affiliated with, Armstrong. and his affiliated entities. 12.
J
Plaintiff is informed and believes and thereon
alleges that defendant DEI, Inc. (HDEI") is a Texas corporation 5 6 7
with its principal place of
10
Ir
f2
affiliated entities. 13.
15 16
Texas corporation with its principal place of business in Dallas, Texas, and is owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 14.
\9 20
21
22
23
controlled by, and affiliated with, Armstrong and his affiliated entities. 15.
26
Plaintiff is informed and believes and thereon
alleges that defendants Dresdner Enterprises, Inc., Dresdner Petrole~,
Inc., and Dresdner Financial Management Corporation
(collectively "Dresdner") are Texas corporations with their principal place of business in Dallas, Texas, and are owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 16.
U
25
Plaintiff is informed and believes and thereon
alleges that defendant H.T. International is an entity owned or
17 IB
Plaintif: is informed and believes and thereon
alleges that defendant suisse Texas, Inc. (HSulsse Texas U ) is a
13 1.11
in Dallas, Texas, and is
owned or controlled by, and affiliated with, Armstrong and his
8 9
b~siness
Plaintiff is informed and believes and thereon
alleges that defendants Knightsbridge Companies, Inc. and Knightsbridge Guaranty Company (collectively "Knightsbridge") are
CC»4PlAINT
-4-
Texas corporations with their principal place of business in 2
Dallas, Texas, and are owned or controlled by, and affiliated
3
with, Armstrong and his affiliated entities. 17.
4
Defendants Remington, Winthrop, CCA Holdings, CCAJ,
5
Chase Development, Cal-Pacific, Chayson, C.R. Acquisitions, DEI,
6
Suisse Texas, H.T.
7
sometimes-collectively be referred to as the "Armstrong
8
Companies." JURISDICTION AND VENUE
9
18.
10
This is an adversary proceeding brought pursuant to
Bankruptcy Rule 7001, 11 U.S.C. §§541(a), 542, 544, and 548.
\1
19.
12
This Court has jurisdiction of this adversary
proceeding pursuant to 28 U.S.C. §§151, 157, and 1334.
13
Venue is
proper pursuant to 28 U.S.C. §1409.
1<1
20.
15
This adversary proceeding is a core proceeding
pursuant to 28 U.S.C. §157 and this court may enter a final
16
jUdgment herein.
17
GENERAL ALLEGATIONS
18
21.
19
Plaintiff is informed and believes and thereon
alleges that an involuntary bankruptcy petition was filed against
20
the Debtor on March 20. 1991.
2\
Prior to filing the petition, the
Debtor operated as a tax deposit and payment service.
22
The
plaintiff, the Chapter 11 Trustee in this case, was appointed on
23
24
International, Dresdner and Knightsbridge will
March 26, 1991.
The Debtor, by and through the Trustee, continues
-,
to operate a payroll tax deposit and payment service. 26 CCf4PLAII4T
-5-
22.
Plaintiff is informed and believes and thereor.
2
alleges that Armstrong is an insider of the Debtor.
3
the sole shareholder and chairman of the Debtor from March 19a9,
J
when he purchased the Debtor, until the petition was filed.
5
Armstrong owns or controls all of the Armstrong Companies. 23.
C
A.rmstrong ',,:3=.
On various different dates over the period in which
7
Armstrong controlled the Debtor large sums of money belonging to
B
the Debtor were transferred directly or indirectly to various of
9
the Armstrong Companies, including without limitation Dresdner,
10
Remington, Knightsbridge, and Winthrop.
II
books and records show that (a)
12 IJ 111
15 16
17
\B 19
20
2]
Knightsbridge,
26
(b) Debtor's funds were transferred to an account
at Merrill Lynch which were then transferred to Bank One in Dallas and then transferred to Knightsbridge, and (c) on numerous dates in 1990 funds were transferred from Debtor to the Merrill Lynch account and then "invested" in various of the Armstrong Companies such as Dresdner, Remington, Winthrop, and Knightsbridge. Such trans fers-- from Debtor' directly or indirectly to Armstrong companies will be referred to herein as HAffiliate Transfers H. 24.
All, or virtually all, of the Affiliate Transfers
came from funds being held by ~bl~gations
~btor
for payment of tax
of Debtor's clients.
25. 25
in January and February of 1991
approximately $11,000,000 was transferred from Debtor directly to
21
22
for example, Debtor's
In October 1990, the internally prepared financial
statements of the Debtor show an intercompany receivable of $68,800,000 which evidences that the total Affiliate Transfers
C~PLAINT
-6-
were at least in that amount.
Plaintiff and Plaintiff's
2
accountant have searched the files of Debtor and questioned
]
relevant staff of Debtor, but have found no collateral,
d
agreements, notes, or interest payments relating tG these
5
transfers. 26.
6
~~e
securi~j
In 1990, Debtor's internally prepared financial
7
documents reflect short term indebtedness owed by Knightsbridge to
8
Debtor in an amount of $8,175,021.55 reflecting apparent transfers
9
in approximately that amount from Debtor to Knightsbridge.
10
Plaintiff and Plaintiff's accountant have searched the files of
11
Debtor and questioned the relevant staff of Debtor, but have found
12 13
no notes, agreements,
relating to such transfers. 27.
\ Ii
15 16
19
20 21
made. 28.
2d
25 26
Plaintiff is informed and believes and alleges on
that basis that some of the funds comprising the Affiliate Transfers were further distributed from the initial recipient company to one or more other companies among the Armstrong Companies. 29.
22 23
Plaintiff is informed and believes and alleges on
that basis that Armstrong caused the Affiliate Transfers to be
17 18
interest payments, collateral or security
Plaintiff is informed and believes and alleges on
that basis that large sums of money ostensibly advanced by one or more of the Armstrong companies were used (a)
to purchase, rent or
lease real property, goods or services for the personal use and/or enjoyment of Armstrong,
C~PLAINT
(b) to make investments or acquisitions
-7-
for the benefit of Armstrong,
(c) to make 1 arge gi fts, dona t ie,.s .
2
or contributions at the direction and for the benefit of
]
Annstrong,
a
or criminal liability of Armstrong, or (e)
5
the direct of indirect benefit of Armstrong.
6
(d)
30.
for a fund to protect against litigation or ci·.;il for other purposes fer
Plaintiff is informed and believes and alleges on
7
that basis that the Armstrong Companies that advanced large sums
8
of money referred to in SUbparagraph E immediately above (a) were
9
not sufficiently profitable to generate such sums on their own
10
operations, and (b) were the recipients of large sums of money
11
directly or indirectly from Debtor as part of the Affiliate
12
Trans fers .
}3 \4
31.
Plaintiff has been informed of and believes the
following and on that basis alleges: a)
IS
Some or all of the Armstrong Companies that
16
received Affiliate Transfers were not profitable and that some of
17
the funds received from Debtor were used to pay operating expenses
18
of the recipient Affiliate Company. b)
19
Upon obtaining control of the Debtor,
20
Armstrong wired approximately $2 million from the Debtor to the
11
holding company for some of the Armstrong Companies.
12
funds, Armstrong retired a $600,000 note which the prior owners of
23
the Debtor had executed to Mr. Stanley Rosenberg and that
211
Armstrong had agreed to pay as the "price" for buying the Debtor.
25 26
c)
out of these
In July, 1989, Armstrong transferred
approximately $3 million of funds belonging to the Debtor to
C~PLAH/f
-8-
Dresdner Enterprises, 2
Inc., a company which formerly owned the
Debtor and is currently owned by Armstrong. d)
J
In August, 1989, Armstrong transferred $7
million of the Debtor's money to an account of Dresdner 5
Enterprises,
Inc.
in order to purchase a shopping center that
6
Armstrong or one of the Armstrong Companies was buying.
7
e)
In February, 1990 Armstrong transferred
B
approximately $10
9
purchase of a showpiece ranch of about 2,000 acres for Armstrong's
milli~n
of the Debtor's funds to Winthrop for
personal residence.
Ir
million was booked to Armstrong, who gave a deed of trust on the
12
property to Winthrop.
13
to the Debtor.
14
also used for improvements on Armstrong's ranch,
15 Ib
19
20
2' 22 23 24
Portions of the SlO million from the debtor were including
abou~
and for prepaid
interest on Armstrong's note. f)
In October 1990, the $68,800,000 intercompany
receivable was divided into two obligations.
One obligation is
shown on the books of Debtor as a long-term "bond" in the amount of $57 million.
The other obligation is shown on the books of
Debtor as "affiliated notes" and a "long term debt" of $11.8 million from Winthrop to the. Debtor.
No repayment of these
intercompany receivables has been found by Plaintiff to be shown on Debtor's books. g)
25
26
Winthrop in turn assigned the deed of trust
$2.4 million spent on a cutting horse arena,
17
18
A loan in the amount of approximately
S6.~
10
On an unkncwn date, Armstrong transferred some
$J million of the Debtor's funds
C""PLAINT
into one of the Armstrong
-9-
i~
Cornpanies--Oresdner Petroleum--to purchase oil and gas leases the name of Dresdner Petroleum. h)
)
Armstrong personally used funds believed
~o
4
~ave
5
Armstrong purchased a Jaguar automobile for $105,000,
6
Royce for $135,000, at charity events.
,,
for $J6,000 for a vice-president of Debtor, christine Grernbling
8 9
come from the Debtor for unauthorized purposes.
using Debtor's funds.
For example, and a Rolls
He also purchased a BMW
He contributed hundreds of thousands of
dollars to political campaigns.
He was drawing a salary of some
10
$21,000 every two weeks--Dver $500,000 a year--from his various
11
entities Which were,
12 13 14
15
from Debtor.
\8 19
20
21 22
23 24
25 26
He rented a suite at the Mark Hopkins Hotel in
San Francisco for approximately $160,000 per year.
On infonnation
and belief, all the funds for these purchases and expenses were diverted from the Debtor. i)
16
17
in turn, drawing funds for operating expenses
In December 1988, the Debtor had on its books
a series of unsecured illiquid loans to its then sole shareholder, MaxPharrna, Inc. or affiliates of MaxPharma, Inc.
These ill iquid
affiliate loans amounted to approximately $14 million.
Additional
affiliate loans were thereafter made, increasing that amount.
At
the time Armstrong purchased the Debtor in March 1989, there were approximately $14-18 million of affiliate loans on the Debtor's books.
The purchase by Armstrong closed on March 29, 1989.
On
April 10, 1989, an Armstrong Affiliate, Dresdner Enterprises, Inc., purchased the $18.9 million of intercompany receivables for a note which was backed up by approximately $1.5 million worth of
CQHPLAINT
-10-
collateral.
Hence, on behalf of the Debtor, Armstrong
a~par=~L::
~
had a period of time in which it could have sued MaxPharma's
]
affiliates for this $18.9 million of receivables.
J
the Armstrong Companies at Armstrong's direction, bought out th8se
5
receivables for notes having questionable value. j )
6
Instead, one
After Armstrong acquired the Debtor, the
7
Debtor became the primary source of funding for all Armstrong's
B
Dallas operations.
9
a month in operating costs--almost $5 million a year--apart from
The Armstrong Companies required some $400,000
10
any operating costs incurred by the Debtor itself.
II
such operating costs were obtained from the Debtor.
k)
11 13
acquire
~arker
\5 16
\7
1B \9
20 21
In March 1991 Armstrong invested SJ,OOO,OOO to
Automotive. 1)
lJ
Armstrong caused Debtor's funds to be
transferred to the Armstrong companies by various methods, including the following:
One of the Debtor's employees would
write checks payable to federal, state or local taxing authorities on behalf of the Debtor's clients.
Those checks would be
processed through the Debtor's computer, and this would automatically create a ledger entry reflecting that the check had been issued.
This ledger entry was necessary so that on the books
of the Debtor and other 23
The funds for
app~opriate
financial documents,
appear as if the check had actually been written.
it would
After the check
had been processed in this manner, the Debtor had another employee 25
26
physically pull such checks before thE! were mailed or deposited in a federal depository bank.
Instead of transmitting such checks
CQHPlAfNT
-11-
to the taxing authorities, Debtor would physically hold the
c~e~~:3
2
for an average of three months, until the next quarter.
J
end of the. three-month period, the Debtor would then void the original held-back check.
At
A new "good" check would be issued
5
covered by SUfficient new funds.
6
through diversion of clients' funds.
7
to the authorities, and this new check would have to be held, thus
8
repeating the process. rn)
9
10 II
12
13
1d
Debtor's funds to the Dallas office.
23
COUNT ONE (Recovery of Fraudulent Transfer Pursuant to § 548 and California Civil Code §§ 3439.04 and 3439.05) 32.
Plaintiff realleges and incorporates by reference
Paragraphs 1 through 31. To the extent that the claims herein arise pursuant
to Bankruptcy Code Section 544(b), plaintiff is asserting the rights of all of the unsecured creditors with an unsecured claim allowable in the bankruptcy case, which were creditors at the time of the complained of 34.
24 25
These funds were then
distributed to whichever Armstrong Companies needed them.
33.
22
If t t : cash flow showed that the
entities would soon run out of funds, Armstrong would transfer the
17
21
Armstrong's Dallas staff prepared a weekly
the next several months.
16
20
A new check would be issued
cash summary projecting the Armstrong Companies' cash needs for
15
\B
The new funds were obtained
transac~ions.
Armstrong has caused current assets of the Debtor
to be transferred to defendants without adequate or fair, and
26
Ce»o1PLA llolT
-12-
often without any consideration, while retaining all of
2
t~e
liabilities of the Debtor. 35.
]
The transfers of assets from the Debtor to the
defendants were made while the Debtor was insolvent and for less 5
than a reasonably equivalent value. 36.
6 7
8
voidable pursuant to
"
37.
Id
17
18 19
38.
n
25
the transfers are
California civil Code § 34J9,05, and Bankruptcy Code § 544(b). 39.
The transfers of assets from the Debtor to the
defendants were made while the Debtor was engaged in business or a transaction for which its remaining property was an unreasonably small capital and were made for less than a reasonably equivalent value. 40.
By reason of the foregoing,
voidable pursuant to § 548(a) (2)
the transfers are
of the Bankruptcy Code,
California civil Code § 3439.04 and Bankruptcy Code § 544(b). 41.
21 2.1
By reason of the foregoing,
voidable pursuant to section 548(a) (2) of the Bankruptcy Code,
20
2I
The transfers of assets from the Debtor to the
less than a reasonably equivalent value.
\5 16
548(a) (2) of the Bankruptcy Code,
defendants caused the Debtor to become insolvent and were made for
12 I]
§
the said transfers are
California Civil Code § 3439.05, and Bankruptcy Code § 544(b).
9 10
By reason of the foregoing,
The transfers of assets from the Debtor to the
defendants were made without receiving reasonably equivalent value in exchange for the transfers, and the Debtor intended to incur,
26
C~PLA1NT
-1]-
• or believed or reasonably should have believed that it wculd 2
incur, debts beyond its ability to pay as they became due. 42.
]
By reason of the foregoing,
the transfers are
voidable pursuant to California civil Code § 3439.04 and § 544(t) 5
of the Bankruptcy Code.
6
43.
The transfers of assets from the Debtor to
~he
7
defendants were made while the Debtor intended to incur debts
8
beyond its ability to pay as such debts matured and for less than
9
a reasonably equivalent value. 44.
10
II
voidable pursuant to 45.
12 I]
IJ
17 18
548(a) (2) of the Bankruptcy Code.
The transfers of assets from the Debtor to the
defraUd the Debtor's creditors. 46.
By reason of the foregoing, the transfers are
voidable pursuant to
§
548(a) (1) of the Bankruptcy Code,
California civil Code § J4J9.04 and § 544(b) of the Bankruptcy Code. WHEREFORE, plaintiff prays for relief as set forth
19
20
§
defendants were made with actual intent to hinder, delay or
\5 16
By reason of the foregoing, the transfers are
hereinbelow. COUNT TWO (Constructive Trust)
21
22
47.
23 24
paragraphs 1 through 46, 48.
25 26
Plaintiff realleges and incorporates by reference
By
vir~ue
inclusive. of the wrongful acts described above,
defendants have been unjustly enriched and hold the Debtor's funds
COHPlAINT
-14-
• belonging to the Debtor's estate, and any proceeds of those f~~~s, :2
as well as any assets received from or acquired with money
]
received from the Debtor, as constructive trustees for the
benef~~
of the Debtor's estate. WHEREFORE, plaintiff prays for relief as set forth
5 6
hereinbelow. COUNT THREE (Turnover of Property Pursuant to § 542)
7
8 9
49.
10
Paragraphs 1 through 48,
11
50.
t2 13 14
17
18 19
Prior to the filing of the petition, the Debtor Such property consisted
of money and other property which is property of this estate, as set forth hereinabove. 51.
The property of the estate referred to in the
preceding paragraph, or proceeds of such property, is now in the possession of the Defendants.
Defendants have failed and refused
to surrender such property, or the proceeds thereof to the trustee. WHEREFORE, plaintiff prays for relief as set forth
20
2I
inclusive.
transferred its property to defendants.
15 16
Plaintiff realleges and incorporates by reference
hereinbelow. COUNT FOUR (Injunction)
22 23
52.
24
25
Plaintiff realleges and incorporates by reference
paragraphs 1 through 51,
inclusive.
26 CC»olPlAIWT
-15-
• 53.
Plaintiff is entitled to injunctive relief
pur5~3~:
2
to Bankruptcy Rules 7001(7) and 7065, Bankruptcy Code § 105
3
F.R.C.P. §65, restraining defendants from destroying or
~~d
other~is2
disposing or altering the property of the estate, and other 5
documents and information in defendants' possession, custody or
6
control concerning the use and transfer of the Debtor's funds.
1
Plaintiff is also entitled to injunctive relief ordering
8
defendants to immediately turn over to plaintiff all property of
9
the estate in defendants' possession, custody or control and to
iO 11
12
refrain from dissipating, transferring, or encumbering assets or funds received from the Debtor or acquired with the Debtor's assets or funds. WHEREFORE, plaintiff prays for relief as set forth
\3 14
hereinbelow.
COc-NT FIVE (Conversion)
15 16
54.
,7 18
paragraphs 1 through 53, inclusive. 55.
19
20 21
By virtue of the acts set forth in paragraphs 2]
through 31 hereinabove, Armstrong has converted assets of the Debtor and by such conversion has greatly damaged Debtor. WHEREFORE, plaintiff prays for relief as set forth
22 23
Plaintiff real leges and incorporates by reference
hereinbelow.
24 25 26 CCfolPlAINT
-16-
• COUNT SIX (Breach of Fiduciary Duties) 2
56.
J 4
referens~
paragraphs 1 through 55, inclusive. 57.
5 6
ilaintiff realleges and incorporates by
As chairman of Debtor, Armstrong at all relevant
times owed fiduciary duties to Debtor. 58.
7
By virtue of the acts and conduct set forth in
8
paragraphs 23 through 31 hereinabove, Armstrong has breached his
9
fiduciary duties owed to the Debtor in
~hat
he has knowingly
10
entered into numerous conflicts of interest, has engaged in self-
11
dealing to the detriment of the Debtor, has failed to act in the
12
best interests of the Debtor, has failed to control and manage the
13
assets of Debtor in a prudent manner, and has misappropriated
14
assets of the Debtor, and has by such breaches of fiduciary duty
15
caused great damage to the Debtor. WHEREFORE, plaintiff prays for relief as set forth
16
17
hereinbelow. COUNT SEVEN (Breach of contract)
IS 19
59.
20 21
paragraphs 1 through 58, 60.
22 2]
Plaintiff realleges and incorporates by reference inclusive.
According to the books and records of the Debtor,
the Armstrong Companies have obligations totaling $68.8 million to the Debtor under junk bonds,
25 26
obligations.
promissory notes or other
On information and belief, interest on such notes
and obligations due to the Debtor has not been paid by the
CCt\PlAlllT
-17-
•
·.
companies owing such obligations in violation of the terns and 2
conditions thereof and therefore are in breach of such
3
obligations. 61.
Debtor has performed all obligations on its part
t~
5
be performed except those excused by the conduct of defendants or
6
by virtue of other causes.
7
WHEREFORE, plaintiff prays for relief as follows:
8
1.
?
10
dissipating, transferring, or encumbering assets or funds received from the Debtor or acquired with the Debtor's assets or funds. 2.
Il
12 13 1<1
17
18 19
the Trustee, and to render an accounting to the court for the disposition by defendants of such property. 3.
22
possession, custody or control and on any assets in defendants' possession, custody or control received from or acquired
wi~~
money received from the Debtor. 4.
For judgment against defendants for an accounting
of all payments and transfers of the Debtor's property by defendants to the extent such transfers were fraudulent. 5.
'23
24
for the imposition of a constructive trust on
plaintiff's funds and any proceeds of those funds in defendants'
20 21
For an injunction or order requiring defendants to
surrender the property of the estate, or the proceeds thereof, to
15 \6
For an injunction restraining defendants from
For an order avoiding all transfers to the
defendants to the extent such transfers were fraudulent.
25 26
CCtlPl>. Ill!
-18-
6.
For a judgment in the total amount avoided,
2
an order directing payment of such amount by defendants to
J
plaintiff, plus interest thereon at the legal rate.
J
7.
For compensatory damages according to proof.
5
8.
For exemplary damages in a sum sufficient to
6
9.
9
For such other and further relief as this Court
deems appropriate. Dated:
tj;kI2/ 177/ FELDMAN, WALDMAN & KLINE A Professional Corporation
10
11
BYqylu;, ;~
12
L.~. Chris Martiniak Attorneys for Trustee Frederick S. Wyle
13 14
15 16 17
18 19
20 21
22
23
24 2S
26 CCl4PLAIHT
-19-
---
dete~
defendants from similar conduct in the future.
7
8
a~j
• FELDMAN, WALDMAN & KLINE A Professional Corporation 2 ;ATRICIA S. MAR L.J. CHRIS MARTINIAK J
2700 Russ Building
4
235 Montgomery street Francisco, CA 94104 Telephone: (415) 981-1300 San
5
Attorneys for Trustee 6
Frederick S. Wyle
7
8
UNITED STATES BANKRUPTCY COURT
9
NORTHERN DISTRICT OF CALIFORNIA In re
10
)
BANKRUPTCY
NO.
91-31077 LK
)
II
HAMILTON
TAFT
&
COMPANY,
)
Chapter 11
)
Debtor.
12 13
----------------))
IJ
FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft- & Company,
) ) ) )
Plaintiff,
)
15
)
16
v. 17
18 19
20
21 22 23 24
25
CONNIE c. ARMSTRONG, JR.; THE REMINGTON COMPANIES, INC.: WINTHROP REALTY COMPANY: CCA HOLDINGS, INC.; CCAJ CORPORATION; CHASE DEVELOPMENT CORP.; CHAYSON MORTGAGE AND INVESTMENT COMPANY; CAL-PACIFIC MANAGEMENT CORP.; C.R. ACQUISITIONS; DEI, INC.; DRESDNER FINANCIAL MANAGEMENT CORPORATION: DRESDNER ENTERPRISES, INC.; DRESDNER ,PETROLEUM, INC.; H.T. INTERNATIONAL, INC.; SUISSE TEXAS, INC.: KNIGHTSBRIDGE COMPANIES, INC.: and KNIGHTSBRIDGE GUARANTY COMPANY, I
26
)
Defendants.
) ) )
) ) ) ) ) } ) ) )
} )
) )
} ) )
~---------------}
Adversary Proceeding No.
u.s.
Federal Bureau
In Reply I Ploa-se Refer Ftle No
~C
Departmen.
Justice
of InveStlgatlOn
450 Golden Gate Avenue
1;0
San Francisco, California 94102
September 23, 1988
Mr. Joseph P. Russoniello united states Attorney Northern District of california 450 Golden Gate Avenue Box 36055
San Francisco, California 94102
Attention:
Mr. Flay Dawson
Assistant u. S. Attorney Re:
......~
_
I~~~
PRESIDENT, dba
HAMILTON TAFT AND COMPANY, SAN FRANCISCO, CALIFORNIA; UNKNOWN SUBJECTS I dba
MAX FHARMA, INCORPORATED, 200 CRESCENT COURT, SUITE 1375, DALI.AS TEXAS;
POSSIBLE WIRE FRAUD b -: i:
Dear Mr. Russoniello:
Referenced conference between Assistant U.s. Attorney
(AUSA) Michael Yamaguch~ and Special Agent (SA)
on September 14, 1988.
I
I
This letter is to confino. the above referenced conference in which SA delineated the details of the allegation and the results or his investigation to date regarding captioned matter. AUSA Mike Yamaguchi indicated based on what was presented to him as well as his examination of documentation pertinent to the captioned matter, there was insufficient
I
I
1 - Addressee /1 - San FranClSCO ((196A-2868)
RES/bfa (2 )
Mr. Joseph P. Russoniello
evidence to support a violation of federal law at this time and AUSA Yamaguchi added if further information could be obtained regarding the allegations presented, he would reconsider his opinion. he would therefore decline prosecution.
Based on AUSA Yamaguchi's declination, our office will close its investigation into the captioned matter. Very truly yours, RICHARD W. HELD
Special Agent in Charge b7C:: By:
I
Superv~sory
2*
Speclal Agent
f
.
~ /
.'
---
( I2IJII199j)
FEDERAL BUREAU OF INVESTIGATION Precedence:
To:
San
From:
PRIORITY
Date:
Sacramento Contact:
SA Will Hatcher
Attn:
FranClSCO
IA
1"'--
02/10/1997
....
Approved By:
t ., .-.
; ,'I~
Drafted By:
_-
Case ID #:
196D-SF-93255
Title:
.....1 epg
(Pend~ng)
CONNIE CHIP ARMSTRONG, JR.;
I
IFormerly dba HAMILTON-TAFT COMPANY FBW (D); MF; ITSP 00:
synopsis:
SF
Caples of FD-302s and inserts enclosed from Sacramento
flle 196B-1364.
Reference:
Enclosures:
196D-SF-93255 Serial 124
FD-302 of of of of
·FD-302 FD-302 FD-302 Insert FD-302 FD-302 FD-302
at of of of FD-302 of FD-302 of FD-302 of
Ion 2/19/86 Ion 3/12/86 Ion 5 /23/86 Ion 6/19/8 6 ~uaene
Oreaon from 5/1 4 - 6/18/86 Ian 6/2 5/86 Ion 8/7/86 I,on 9/17/86 Ion 3/31/8 7
Ion
Ion 3 /25/87 4/7/8 7
A review of closed Sacramento flle 196B-1364 revealed the above enclosed FD-302s and inserts .
Details:
••
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