The opinion of the court was delivered by: Cedarbaum, District Judge.
Official Committee of the Unsecured Creditors of Color Tile,
Inc. sues eight individuals and twenty-three legal entities on
19 grounds. I dismissed ten of the claims (8-18) and four of the
defendants (Coopers and Lybrand, LLP, Hedley, Philippin, and
Bewkes) at earlier stages of the
case. Official Committee of Unsecured Creditors of Color Tile,
Inc. v. Investcorp S.A., et al., 80 F. Supp.2d 129 (S.D.N.Y.
1999) (dismissing Claims 13-18); Official Committee of
Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., et
al., 1999 WL 754015 (S.D.N.Y. Sept. 24, 1999) (dismissing
Claims 8-12). Defendants have now filed motions for summary
judgment seeking the dismissal of all remaining claims. At oral
argument, I granted Loeb's motion with respect to Claim Two
(alleging that Loeb violated his duty of loyalty to Color Tile),
and reserved decision on the remaining motions. See
Transcript, December 14, 2000, at 43-44, 99. For the reasons
that follow, the motion for summary judgment with respect to
Claims One through Five is now granted. Defendants' motion for
summary judgment on Claims Six and Seven is denied. Defendants'
motion for summary judgment with respect to Claim Nineteen is
held in abeyance pending further submissions by the parties.
"The Investcorp Group" comprises a number of related companies
and affiliates which act together as principals and
intermediaries in a variety of international investment
transactions on behalf of themselves and their investors.
Investcorp S.A. ("SA"), Investcorp International Inc.
("III"),*fn1 Investcorp Bank, E.C. ("EC"), and various Cayman
Island holding companies are some of the companies affiliated
with the Investcorp Group.
In 1989, III recommended Color Tile as a potentially
attractive investment. In order to facilitate the acquisition of
Color Tile, affiliates of EC formed a holding company called
Color Tile Holdings, Inc. ("CT Holdings"). CT Holdings acquired
all of Color Tile's common stock. Various employees, including
Color Tile management, owned Class C ("non-voting") shares in CT
Holdings, amounting to an 8% equity stake in the company. A
number of affiliated companies owned all of the Class D
("voting") shares in CT Holdings. The voting shareholders fell
into two categories: 1) four Cayman Island companies which
collectively owned 20% of CT Holdings' equity and 28% of the
voting stock: Corporate Equity Limited ("CEL"), Acquisition
Equity Limited ("AEL"), Funding Equity Limited ("FEL"), and
Planning Equity Limited ("PEL"); and 2) three "Tile" companies
which collectively owned 72% of CT Holdings' equity and each of
which owned 24% of the voting stock: Tile Capital Limited, 99%
of the stock of which was owned by Elias N. Hallak, the co-COO
of SA; Tile International Limited, 99% of the stock of which was
owned by Michael L. Merritt, the co-COO of SA; and Tile Equity
Limited, 99% of the stock of which was owned by Nemir A. Kirdar,
the President and CEO of SA.*fn2
In 1993, American Blind Factory ("ABF"), a family-run private
company that sold blinds and wallpaper through direct-response
marketing and retail stores, was offered for sale. Donaldson,
Lufkin and Jenrette ("DLJ"), retained by ABF to assist with the
sale, contacted Color Tile as a potential strategic buyer. There
were five written offers for ABF, ranging from $68 million to
$96 million. On behalf of Color Tile, III submitted an all-cash
bid of $85 million,*fn3 subject to due diligence. This bid
In September 1993, after the completion of some due diligence,
the Color Tile board met formally and discussed the potential
acquisition of ABF. At this time, Color Tile's board consisted
of five members: Daniel Gilmartin (CFO); Eddie Lesok (CEO);
Larry Nagle (President); Walter Loeb (an outside director
formerly retained by III as an independent consultant); and Paul
Soldatos (director and officer of III).
In October 1993, Color Tile filed a Registration Statement on
Form S-1 in connection with a proposed offering of $200 million
in Senior Notes; first and second amendments to this
registration statement were filed in November and December 1993,
respectively. On December 10, 1993, Color Tile issued a
Prospectus in connection with its proposed offering of Senior
Color Tile did not acquire ABF directly because the necessary
financing and SEC and bank approvals could not be arranged
within the time period set by DLJ. Accordingly, the Investcorp
Group agreed to supply the financing needed for the transaction
by creating ABF Acquisition Corp. ("ABFAC") to purchase ABF.
Three III officers, Hedley, Soldatos, and Tung, were installed
as the officers and directors of ABFAC. ABFAC was capitalized
with a $15 million capital contribution from its
shareholders*fn4 and a $70 million loan from Chemical Bank
unconditionally guaranteed by SA. On November 4, 1993, ABFAC
paid $74,935,217 for ABF, and on November 5, 1993, ABFAC
incurred various additional fees of $4,287,500 in connection
with the acquisition.*fn5 ABFAC then granted Color Tile an
option to purchase ABF.
In addition to the ABF assets, on November 4, 1993, ABFAC also
purchased 24 retail stores which operated under the names "Mrs.
Kay's" and "Kay and Kay Tile Depot." On the same date, the Color
Tile board approved, as "in the best interests of [Color Tile]
and its stockholders," the purchase of these retail assets from
ABFAC for $1,754,000.
On December 7, 1993, Color Tile created a wholly-owned
subsidiary, ABWF, for the purpose of exercising the option to
purchase ABF from ABFAC. On December 15, 1993, Color Tile's
board executed a unanimous written consent approving, as "in the
best interests of [Color Tile] and its stockholders," the
assignment of Color Tile's option to purchase ABF to ABWF. On
December 17, 1993, Color Tile's board executed another written
consent approving, as "in the best interests of [Color Tile],"
an $80 million capital contribution
to ABWF in order to facilitate the purchase of ABF. ABWF then
paid $80 million to ABFAC for ABF. ABFAC distributed $15 million
of the $80 million to the ABFAC shareholders and repaid the
remaining $65 million balance on the Chemical Bank loan which
had been unconditionally guaranteed by SA. Color Tile stated in
its 1993 10-K that the $80 million purchase price, including
fees and expenses, "reflects the same price paid by ABF[AC] for
the ABF assets, adjusted to reflect [$4.3 million] payable to
certain Investcorp affiliates . . . and the reimbursement of
transaction costs incurred in connection with such acquisition."
Ultimately, the ABF assets were not as profitable as Color
Tile's projections had predicted. In the Fall of 1994, Color
Tile received an additional $29 million term loan from its bank
group. In June 1995, Investcorp entities lent $15 million to
Color Tile (which they later contributed to Color Tile's
capital); in September and October 1995, Investcorp entities
made an additional $15 million contribution and arranged an
additional $15 million loan from Chemical Bank. Nevertheless, on
January 24, 1996, Color Tile and CT Holdings each filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy
The plaintiff in this action is the Official Committee of the
Unsecured Creditors which was appointed in the 1996 bankruptcies
of Color Tile and CT Holdings. The Committee is empowered to
prosecute certain claims on behalf of the estates of Color Tile
and CT Holdings pursuant to a September 17, 1997 Order of the
United States Bankruptcy Court for the District of Delaware
which approved the Global Settlement Agreement among Color Tile,
CT Holdings, the Committee, and other entities.
Summary Judgment Standard
Summary Judgment is authorized when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Fed.R.Civ.P.
56(c). The judge's role in summary judgment is not "to weigh the
evidence and determine the truth of the matter but to determine
whether there is a genuine issue for trial." Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91
L.Ed.2d 202 (1986). This requires that the party opposing
summary judgment "do more than simply show that there is some
metaphysical doubt as to the material facts." Matsushita Elec.
Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106
S.Ct. 1348, 89 L.Ed.2d 538 (1986). "[T]he plain language of
Rule 56(c) mandates the entry of summary judgment, after adequate
time for discovery and upon motion, against a party who fails to
make a showing sufficient to establish the existence of an
element essential to that party's case, and on which that party
will bear the burden of proof at trial." Celotex Corp. v.
Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265
Claim One alleges that Kirdar, Hallak, and Merritt, as well as
the four Cayman Island corporations that were voting
shareholders of Color Tile, CIP, Ltd., and SA violated their
duty of loyalty to Color Tile by causing Color Tile "to purchase
the ABF assets for an unfair price, permitting Investcorp to
take $4 million in fees and causing Color Tile to take on an
imprudent and unmanageable debt structure to finance the
purchase of the ABF assets." The plaintiff refers to these
collectively as the "CT Holdings Controlling Shareholders."
Under Delaware law, a shareholder owes a fiduciary duty to a
corporation only if it (1) owns a majority interest in the
corporation, or (2) exercises control over the business affairs
of the corporation. Ivanhoe Partners v. Newmont Mining Corp.,
535 A.2d 1334, 1344 (Del. 1987). It is undisputed that no one
defendant owned a majority of the CT Holdings shares, although
SA was assigned 52% of CT Holdings' voting proxies. However,
even if there were sufficient evidence for a reasonable jury to
find that each of these shareholder defendants owed a fiduciary
duty to Color Tile, ...