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JACKSON NAT'L LIFE INS. CO. v. LOUIS LIGATOR

December 23, 1996

JACKSON NATIONAL LIFE INSURANCE COMPANY and JACKSON NATIONAL LIFE INSURANCE COMPANY OF MICHIGAN, Plaintiffs, against LOUIS LIGATOR, ALLISON INDUSTRIES, INC., ALLISON INDUSTRIES, LTD., HYBRITEX DE COSTA RICA, S.A., MOTOR PARKWAY REALTY CORP., MELVIN SMITH, JAMES J. HUME, STUART STEIN, SHAI NESHER, MARIO DE LA HIGUERA, and JOHN and MARY DOES 1-100, Defendants.


The opinion of the court was delivered by: PRESKA

 LORETTA A. PRESKA, United States District Judge:

 This is an action alleging securities fraud, common law fraud, negligent misrepresentation, and fraudulent conveyance in connection with a complex transaction involving the plaintiffs' provision of financing to facilitate the purchase of stock and assets of a group of related businesses allegedly owned or controlled by the various defendants. Defendants Motor Parkway, Inc., Melvin Smith, Stuart Stein, Louis Ligator, Allison Industries, Inc., Allison Industries, Ltd., and Hybritex of Costa Rica, S.A. have brought four different motions to dismiss, relying on Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 9(b). For the reasons that follow, the complaint is dismissed without prejudice for failure to state a claim upon which relief can be granted.

 BACKGROUND

 On June 16, 1995, IPM Products Corporation, a corporation formed and controlled by H.I.G. Capital Management, Inc. ("HIG"), purchased the "IPM Entities," a group of related businesses allegedly controlled by the defendants herein, for $ 41 million. (Second Amended Complaint, P 2). On that date, pursuant to a Revolving Credit and Term Loan Agreement, plaintiffs financed $ 33.3 million of the purchase price by acquiring debt and equity in IPM Products Corporation and its parent company, IPM Products Company. (Second Amended Complaint, P 2).

 Jackson National's investment was allocated as follows:

 
(1) $ 13.3 million Senior Secured Revolver Loan, due June 16, 2002;
 
(2) $ 12.0 million Senior Secured Term Loan, due June 16, 2002;
 
(3) $ 7.4 million Senior Subordinated Notes, due June 16, 2003;
 
(4) $ 500,000.00 of common stock and warrants. *fn1"

 Plaintiffs charge that the "Ligator Defendants," a term that apparently comprises all of the defendants, employed a variety of stratagems to inflate the IPM Entities' operating income by some $ 3 million, thereby inflating the purchase price by $ 21 million. (Second Amended Complaint, P 4). Among the techniques plaintiffs allege were used to achieve this aim were the entry of fictitious inventory credits, the intentional failure to reflect certain expenses, and the recording of false sales in the IPM Entities' accounting ledgers. (Second Amended Complaint, P 4). In addition, plaintiffs charge that the Ligator Defendants purposefully failed to disclose that one of IPM Entities' largest customers, Blue Chip Products Co., was experiencing serious financial trouble and would not be a significant source of future revenue. (Second Amended Complaint, P 5).

 Jackson National claims that it received this allegedly false and misleading information during the period that it was meeting with and negotiating with HIG regarding the proposed acquisition. (Second Amended Complaint, P 36). At that time, "Jackson National posed numerous questions to, and requested various documents directly and/or indirectly about the IPM Entities from the Ligator Defendants and H.I.G." (Second Amended Complaint, P 36). Within this time period, on March 24, 1995, representatives of Jackson National met with "representatives of H.I.G. and the Ligator Defendants, including Hume." (Second Amended Complaint, P 37). According to plaintiffs, at this meeting, the Ligator Defendants stated that the IPM Entities were profitable and financially sound, provided sales, cost, cash flow, profitability and inventory figures for the IPM Entities, distributed balance sheets, income sheets and various other financial data regarding the IPM Entities, and assured Jackson National of the accuracy and completeness of the information provided. (Second Amended Complaint, P 37). Thereafter, Jackson National requested additional information, including the latest available sales and profit figures, inventory, accounts receivable, and accounts payable figures, and a history of inventory write-offs and write-downs, as well as an opportunity to speak with IPM Entities' largest customers, including Blue Chip. (Second Amended Complaint, P 38). This further information was allegedly received "directly or indirectly" from the Ligator Defendants. (Second Amended Complaint, P 39).

 Jackson National had other sources of information besides the Ligator Defendants, however. At one point during the negotiations period, Jackson National retained Coopers & Lybrand, an independent accounting firm, to review financial information concerning the IPM Entities. (Second Amended Complaint, P 38). At an earlier time, in January, 1995, H.I.G. hired Ernst & Young, LLP, "an internationally known accounting firm," to "review[] and analyze the operational and financial affairs of the IPM Entities." (Second Amended Complaint, P 33).

 Nonetheless, plaintiffs allege that it was not until shortly after the closing was complete that "the Ligator Defendants' fraudulent scheme began to come to light." (Second Amended Complaint, P 6). Initial post-closing earnings proved to be less than half of what had been projected based upon the information allegedly provided by the defendants. (Second Amended Complaint, P 47). Plaintiffs claim to have become aware at that point of the widespread fraudulent conduct, including the fictitious entries in the IPM Entities' financial records discussed above. As a result of what plaintiffs characterize as defendants' securities fraud, common law fraud, negligent misrepresentation and fraudulent conveyances, "plaintiffs' $ 34 million investment in the securities of IPM Products Corporation has been rendered valueless, or has substantially lost its value due to the unlikelihood of full repayment." (Second Amended Complaint, P 81). Plaintiffs also allege that IPM Products Corporation has not paid ...


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