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Am General Holdings LLC v. The Renco Group, Inc.

Court of Chancery of Delaware

October 31, 2013

AM GENERAL HOLDINGS LLC, directly and derivatively on behalf of ILSHAR CAPITAL LLC, Plaintiff,
v.
THE RENCO GROUP, INC., IRA L. RENNERT, and ILR CAPITAL LLC, Defendants, andILSHAR CAPITAL LLC, Nominal Defendant.

Date Submitted: June 20, 2013

Stephen P. Lamb, Esquire and Meghan M. Dougherty, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware and Robert A. Atkins, Esquire and Steven C. Herzog, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, Attorneys for Plaintiff.

Kevin G. Abrams, Esquire and J. Peter Shindel, Jr., Esquire of Abrams & Bayliss LLP, Wilmington, Delaware, and Jonathan M. Hoff, Esquire and Joshua R. Weiss, Esquire of Cadwalader, Wickersham & Taft LLP, New York, New York, Attorneys for Defendants The Renco Group, Inc., Ira L. Rennert, and ILR Capital, LLC.

Thad J. Bracegirdle, Esquire of Wilks, Lukoff & Bracegirdle, LLC, Wilmington, Delaware, Attorney for Nominal Defendant Ilshar Capital LLC.

MEMORANDUM OPINION

NOBLE, Vice Chancellor

This is yet another opinion[1] in the ongoing conflict between AM General Holdings LLC ("Holdco") and The Renco Group, Inc. ("Renco"). In this action, Holdco is the Plaintiff bringing suit directly and derivatively on behalf of Nominal Defendant Ilshar Capital LLC ("Ilshar" or the "Company"), and the Defendants are Renco, ILR Capital LLC ("ILR Capital"), and Ira L. Rennert ("Rennert") (collectively, the "Renco Parties" or the "Defendants"). Holdco asserts a variety of claims against the Renco Parties, but it has moved for partial summary judgment only on its breach of contract claim alleging that Ilshar engaged in certain transactions prohibited under the Amended and Restated Limited Liability Company Agreement of Ilshar Capital LLC (the "Ilshar Agreement").[2] The Renco Parties have moved to dismiss seven of Holdco's thirteen claims.[3]

I. BACKGROUND

In 2004, Renco restructured its ownership interest in AM General LLC ("AM General"), which manufactures and sells trucks and related parts, including the military vehicle commonly known as the Humvee. MacAndrews & Forbes Holdings Inc. ("M&F") wished to become a majority-interest holder in AM General and thereafter Renco and M&F entered into negotiations. Upon concluding negotiations, the parties reached an agreement which involved the creation of several entities in order to realize their various goals, including an allocation of ownership and control between M&F and Renco.

The parties formed Holdco as a limited liability company into which they would contribute various assets. Pursuant to the Contribution Agreement by and among Renco, ILR Capital, Rennert, M&F, MacAndrews AMG Holdings LLC ("MacAndrews AMG"), the Company, and Holdco (the "Contribution Agreement"), [4] Renco placed its entire ownership interest in AM General, and M&F paid cash, into Holdco. Holdco has two members, Renco and MacAndrews AMG, a wholly-owned subsidiary of M&F. MacAndrews AMG is Holdco's managing member. Profits and losses of Holdco are generally allocated 70% to MacAndrews AMG and 30% to Renco with certain exceptions.

The parties also created another entity, the Company, which Renco's affiliate, ILR Capital, manages. The Company has two members: Holdco and ILR Capital. Rennert is the sole owner and controller of both ILR Capital and Renco. The parties thus established a structure in which both Renco and M&F held an interest in the entity managed by the other party.

Image Ommitted.

Also pursuant to the 2004 transaction, Holdco was to be paid a preferred return, called the Cumulative Holdco Preferred Return (the "Preferred Holdco Return"), of 8.25% on the capital contribution it made to the Company, compounded annually. The Defendants have calculated this amount to be $324, 706, 840.[5] The first installment of the preferred return was to have been paid on January 31, 2013.[6]Upon distribution to Holdco, Holdco's operating agreement (the "Holdco Agreement")[7] provides that approximately 80% of the return would be paid to Renco and approximately 20% would be paid to MacAndrews AMG.[8]

The Holdco Agreement permits Renco to elect to receive all of the distributions by Holdco if the Revalued Capital Account—the measure of the parties' relative capital interests in Holdco—of MacAndrews AMG is less than 20% of the aggregate Revalued Capital Accounts of the members of Holdco.[9] On October 12, 2012, Renco notified MacAndrews AMG that Renco elected to receive the distribution from Holdco and, pursuant to that election allegedly caused the Company, through ILR Capital, to pay the Preferred Holdco Return amount directly to Renco, rather than to Holdco. The Company held back $48, 658, 515 of that amount (the "MacAndrews Preferred Amount"), which Holdco alleges is the amount MacAndrews AMG is entitled to receive under the Holdco Agreement.

Renco purportedly paid all but $49, 033, 826 of the approximately $350 million it received back to the Company to satisfy certain loans made by the Company to Renco. Holdco alleges this approximately $49 million was retained in cash by Renco (the "Renco Retained Amount"). Holdco maintains that the loans which Renco satisfied with the Preferred Holdco Return were improper loans made in violation of the Ilshar Agreement and were made on terms that were unfair and disadvantageous to the Company (the "Challenged Loans").[10] Holdco further alleges that ILR Capital caused the Company to guarantee a $70 million loan for a Renco affiliate (the "Challenged Guarantee") and is now liquidating investments to cover that guarantee.[11]

Holdco claims that its information rights under the Ilshar Agreement have been violated, because the Challenged Loans, the Challenged Guarantee, and the Challenged Investments (as defined in the following paragraph) were not disclosed until October 12, 2012, and because certain rights to quarterly compliance certificates under the Ilshar Agreement (the "Compliance Certificates") have also been violated for a period of five years.[12] Holdco asserts that it made numerous requests for such materials which have been ignored and is therefore entitled to full access to the Company's books and records.

The Ilshar Agreement permits the Company "to make Investments (other than Prohibited Investments), . . . provided, however that any transaction between the Company and Rennert (or any Affiliate thereof) shall be on terms no less favorable to the Company than those of an arm's-length transaction."[13] The Prohibited Investments are set forth in Schedule B to the Ilshar Agreement and largely concern activities that (i) may make the Company or any of its Affiliates an "operator" of a facility for the purposes of environmental laws, or (ii) may make Holdco or AM General actually or contingently liable to fund an employee pension or defined benefit plan under the Employee Retirement Income Security Act ("ERISA").[14] When the Company eventually delivered its Compliance Certificates, it reported that "the Company and the Managing Member have been in full compliance with the provisions of the Agreement, with the following exceptions" and then listed a series of hedge fund investments that were "possible violation[s]" of the agreement because the Company and Renco "each have or had separate investments" (the "Challenged Investments") in these funds.[15] Holdco alleges that these statements in the Compliance Certificates are proof that the Company has breached the contractual provision requiring it to refrain from making Prohibited Investments.[16]

On January 28, 2013, Renco was sued by the Pension Benefit Guaranty Corporation (the "PBGC") in the United States District Court for the Southern District of New York (the "PBGC Lawsuit"). The Complaint alleges that Renco and an affiliate of Cerberus Capital Management L.P. ("Cerberus") engaged in a transaction in January 2012 to reduce Renco's ownership of its subsidiary RG Steel LLC ("RG Steel"), which was bankrupt and had unfunded pension liabilities of approximately $97 million.[17] The PBGC has the authority not only to recover the unfunded benefit liabilities from the plan sponsor, but also to recover from other entities within the plan sponsor's "controlled group."[18] Renco, as the 80% owner of RG Steel, the plan sponsor, could be jointly and severally liable with RG Steel for the underfunded plan, as could any entity owned 80% or more by Renco or Rennert (thereby potentially making the Company part of the controlled group as well).

The PBGC alleges that it began implementing a plan in January 2012 to terminate RG Steel's pension plans while Renco was still an 80% owner and would have had joint and several liability for the unfunded plans. The PBGC alleges Renco represented to the government that no transaction involving Renco's equity interest in RG Steel was imminent and that it would sign a standstill agreement. The PBGC apparently suspended the termination process based on Renco's representations and sent it a standstill agreement, which Renco ultimately would not sign. On January 17, 2012, Renco announced it had closed a deal with Cerberus which reduced Renco's ownership in RG Steel to 75.5%. The PBGC alleges that a principal purpose of the transaction was to dilute Renco's ownership below the ERISA controlled group threshold and thereby avoid responsibility for RG Steel's pension plan liabilities and that the PBGC relied on Renco's false assurances in suspending its termination proceedings.

Holdco claims that the pending PBGC Lawsuit has triggered the indemnification clause of the Contribution Agreement.

II. CONTENTIONS

Although Holdco has asserted many claims against the Renco Parties, it has moved for partial summary judgment only on its fourth claim which alleges that ILR Capital breached its obligations under the Ilshar Agreement by making Prohibited Investments.[19] Holdco contends that the Ilshar Agreement contains no ambiguity and expressly prevents any overlapping investments in any entity in which Renco or its affiliates hold an interest.[20] Holdco argues that ILR Capital admitted to breaches when it delivered its quarterly Compliance Certificates to Holdco[21] and thus Holdco is entitled to remedies directing ILR Capital to cause Ilshar to divest the Challenged Investments, to specifically perform by refraining from making additional Challenged Investments, to provide an immediate accounting of the Challenged Investments, and to indemnify Holdco for losses resulting from the Challenged Investments.[22]

The Renco Parties have also moved to dismiss seven of Holdco's thirteen claims.[23] They argue that Holdco's thirteenth claim for indemnification under the Contribution Agreement should be dismissed because Holdco has not incurred any injury and because the claim is not ripe. They argue that Holdco's first claim for breach of fiduciary duty is based entirely on conduct that arises from activity expressly governed by the Ilshar Agreement and the claim is therefore duplicative of its breach of contract claims and must be dismissed. The Renco Parties argue that Holdco's second claim against Renco for aiding and abetting the breach of fiduciary duty must be dismissed for failure to state a claim of primary liability by way of the fiduciary duty claims. Defendants argue Holdco's seventh claim for tortious interference with contract should be dismissed because Renco and Rennert are not strangers to the Ilshar Agreement and are entitled to the qualified affiliate privilege. The Renco Parties argue Holdco's eighth claim for unjust enrichment is duplicative of Holdco's breach of contract claims and should therefore be dismissed. The Renco Parties argue that Holdco's ninth claim does not state a claim for conversion under Delaware law and its eleventh claim seeking distribution of the Preferred Holdco Return should be dismissed because Ilshar has already made the distribution and thereby rendered such claims for relief moot.[24]

III. ANALYSIS

A. Holdco's Motion for Partial Summary Judgment

Holdco has moved for partial summary judgment on its contractual claim that ILR Capital breached the Ilshar Agreement by making Prohibited Investments in violation of Sections 3.2(a)(iv) and 6.3(h) of that agreement.

A motion for summary judgment may be granted under Court of Chancery Rule 56(c) if the record shows 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."[25] The moving party bears the initial burden, and the Court must view the evidence in the light most favorable to the nonmoving party. A fact is material if it "might affect the outcome of the suit under the governing law."[26] A genuine issue of material fact is present "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party."[27]

Summary judgment is "frequently appropriate" in resolving contract disputes because, "under Delaware law, the interpretation of a contract is a question of law."[28] Where contract language is unambiguous, "the Court should give binding effect to its ordinary and usual meaning."[29] Nevertheless, material issues of fact regarding the conduct of the contracting parties may still be present, which would prevent the Court from granting partial summary judgment. The Court may look to parol evidence "[o]nly where the contract's language is susceptible of more than one reasonable interpretation . . .; ...


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