Facts

In December 2005, Santa Monica, California-based investment firm Tennenbaum Capital Partners ("TCP") made secured loans in the amount of $95 million to Radnor Holdings Corp. (a privately held company), and purchased $25 million of Radnor preferred stock. The loan proceeds were used by Radnor primarily to repay pre-existing publicly-held secured debt of the Radnor companies. In connection with the stock purchase, TCP appointed one person to the Radnor board of directors. At the time, Radnor was the second largest U.S. manufacturer of foam and plastic cups and cutlery, a leading world producer of expandable polystyrene, the primary raw material used in foam packaging, and had 14 U.S. plants employing 1600 employees. In April 2006, TCP made an additional $23.5 million secured loan to Radnor.

The Radnor manufacturing and distribution operations were hard hit by Hurricane Katrina, revenues declined, and Radnor was unable to make any further draws under a revolving loan facility provided by a syndicate of banks, causing Radnor to file for Chapter 11 bankruptcy relief in August 2006. In the bankruptcy case, Radnor and its financial advisors concluded that a sale of the business was the most effective way of restructuring the company's debt, keeping the business intact and maximizing going concern value, and saving the jobs of its rank and file employees. The bank syndicate declined to submit a bid for the assets. Radnor then urged TCP to submit a purchase offer for the assets and act as a stalking horse bidder for the purposes of an auction that the bankruptcy scheduled for late November 2006. Two investment banking firms, Lehman Bros. and Lazard were engaged to market the Radnor companies. Radnor believed that, absent a stalking horse bid from TCP, the Radnor companies were at risk of a free-fall bankruptcy resulting in a Chapter 7 liquidation. TCP, reluctantly, agreed to submit a stalking horse bid. The Court held that Radnor's decision to enter into an asset purchase agreement with TCP was in the best interests of Radnor’s creditors.

The Official Creditors Committee (the "Committee") appointed in the Radnor bankruptcy cases was comprised primarily of financial institutions holding $130 million of subordinated unsecured notes issued by Radnor in 1998. The Committee objected to the sale to TCP and, on October 31, 2006, filed a complaint against TCP in the bankruptcy case to block the sale. The Committee alleged that the board of directors of Radnor had breached its fiduciary duty to the creditors when Radnor borrowed $95 million from TCP (alleging that the loans further deepened Radnor's insolvency) and that TCP aided and abetted the directors' breaches by making the loans, and that therefore the proper remedy as to TCP was to subordinate the secured loans to the claims of the unsecured noteholders. The Committee also alleged that no reasonable lender would have made the loans, and that the loans represented a "loan-to-own" scheme by TCP to acquire the assets of a financially distressed company, and that the proper remedy was to recharacterize the TCP loans as equity contributions. The Committee also alleged that the TCP-appointed director obtained confidential information regarding Radnor in the course of his director duties, and that it was a breach of fiduciary duty for an insider to make a bid to purchase the assets of the company. Finally, the Committee urged the Court not to allow TCP to credit bid its secured claims at the auction for the assets.

In its published findings, the Court rejected the Committee's "loan-to-own" and "deepening insolvency" theories. The Court noted that TCP properly relied upon Radnor’s financial projections in making the loans, and there was no evidence that TCP had intended that its loans would not be repaid in full or that TCP intended to acquire Radnor when it made the loans. The Court found that Radnor’s creditors were not harmed by the TCP loans, but rather benefited from them, in that most of the proceeds of the loans were used to pay down pre-existing debt, and the remainder provided liquidity to fund Radnor’s new business initiatives, and that, under Delaware law, it was an appropriate exercise of the board’s business judgment to borrow the funds; indeed, the Court found that the TCP loans and preferred stock purchase made in 2005 decreased Radnor’s net debt. Regarding the April 2006 $23.5 million TCP loan, the Court found that it was legitimate for an existing lender to make additional loans to a distressed borrower as a means of trying to protect its existing loans, and that it was an appropriate exercise of the board’s business judgment to borrow funds for the company’s liquidity needs. The Court noted that 95 percent of the holders of Radnor’s subordinated unsecured notes, who comprised a majority of the plaintiff Committee, had consented to the TCP $23.5 million loan and received a fee for their consent, the very same loan they later sought in their complaint to equitably subordinate or recharacterize as equity.

The Court found that there were no grounds to equitably subordinate or recharacterize the TCP loans. The Court found that TCP was not an insider of Radnor, did not control the day-to-day operations of Radnor, did not exercise any undue control over Radnor, did not seek to benefit itself at the expense of other creditors, and did not engage in any other misconduct. The Court also found that the TCP appointed director was a valuable member of the board of directors and consistently acted in the best interests of Radnor, and properly recused himself when matters involving TCP were addressed by the board. The Court held that it was not a breach of fiduciary duty under Delaware law for a director to be part of a group making a bid for the company’s assets, noting that otherwise every management led leveraged buyout would be a breach of fiduciary duty. In this case, the Court found that all potential bidders had access to the very same information that TCP had access to.

The Court stated that the Committee tried the case as it were a "deepening insolvency" case. The Court found that the deepening insolvency theory had recently been rejected by several Delaware courts as either a cause of action or a form of damages calculation. The Court held that under Delaware law a board is not required to wind down operations simply because a company is insolvent, but rather may decide to take on additional debt in the hopes of turning operations around, and such was the case with Radnor. Because the board did not breach its fiduciary duties, TCP could not have been found liable for aiding and abetting any such non-existing breach.

In its effort to block TCP from bidding at the auction for the Radnor assets, the Committee complaint also contained causes of action for recovery of preference payments, avoidance of liens, and disallowance of TCP’s proofs of claim. The Court found against the Committee on each of these causes of action as well, and entered judgment in favor of TCP on all counts, upholding the entirety of TCP’s $128.8 million secured claim, and authorizing TCP to credit bid the entirety of the claim at any auction for Radnor’s assets.

PLAINTIFF’S CONTENTIONS:
The plaintiff Committee claimed that (i) the defendant TCP
sought to acquire Radnor through a "loan-to-own" scheme and that TCP’s secured claims should be subordinated to the claims of unsecured creditors, (ii) the TCP loans were intended to be or should be treated as equity contributions, not true debt, (iii) TCP’s nominee to the Radnor board breached his fiduciary duties in bidding for the company assets, (iv) TCP aided and abetted the board’s breaches of fiduciary, and (v) TCP should not be allowed to credit bid its debt at the auction for the Radnor assets. The plaintiff Committee also claimed that the board of Radnor breached its fiduciary duties by borrowing funds from TCP when Radnor was already insolvent.

DEFENDANT’S CONTENTIONS:
Defendant TCP responded that: (i) it never intended to acquire Radnor and that its bid for the assets in bankruptcy was a reluctant bid at the behest of the Radnor board and financial advisors and that its bid was approved by the Court as in the best interests of creditors; (ii) in making its loans to and equity investments in Radnor, TCP reasonably relied upon solvency certificates and financial projections of Radnor and various financial advisors, and Radnor was not insolvent at the time of the loans and equity investments; (iii) TCP’s single nominee to the four-person Radnor board always acted in the best interests of Radnor and its shareholders and creditors; (iv) all bidders for the Radnor assets had the same access to material information as TCP; (v) a board of directors of an insolvent Delaware company is not required to shut down operations and may continue to raise capital by borrowing from lenders to work its way out of its operational difficulties, and that raising such funds was in the best interests of all creditors.

Result

Defense judgment in favor of TCP on all counts; the allowance of TCP’s secured claim in the amount of $128,835,557.26; and authorization for TCP to credit bid at auction for Radnor assets. The plaintiff Committee filed appeals from the judgment in favor of TCP and the subsequent Court order approving the sale of the Radnor assets to TCP after TCP was the successful bidder at the auction; however, the Committee later dismissed all appeals with prejudice.

Other Information

The Court conducted an eight-day bench trial, heard testimony from 14 witnesses, and admitted more than 350 documents into evidence.

Length

two weeks