Wieboldt Stores, Inc. v. Schottenstein

MEMORANDUM OPINION AND ORDER

Wieboldt Stores, Inc. (“Wieboldt”) filed this action on September 18,1987 under the federal bankruptcy laws, 11 U.S.C. §§ 101 et seq., the state fraudulent conveyance laws, Ill.Rev.Stat. ch. 59, ¶ 4, and the Illinois Business Corporation Act, Ill.Rev.Stat. ch. 32, ¶ 1.01 et seq. Pending before the court are numerous motions to dismiss this action under Rules 9(b), 12(b)(2), 12(b)(6) and 19 of the Federal Rules of Civil Procedure.

*493 I. INTRODUCTION

Wieboldt’s complaint against the defendants concerns the events and transactions surrounding a leveraged buyout (“LBO”) of Wieboldt by WSI Acquisition Corporation (“WSI”). WSI, a corporation formed solely for the purpose of acquiring Wie-boldt, borrowed funds from third-party lenders and delivered the proceeds to the shareholders in return for their shares. Wieboldt thereafter pledged certain of its assets to the LBO lenders to secure repayment of the loan.

The LBO reduced the assets available to Wieboldt’s creditors. Wieboldt contends that, after the buyout was complete, Wie-boldt’s debt had increased by millions of dollars, and the proceeds made available by the LBO lenders were paid out to Wie-boldt’s then existing shareholders and did not accrue to the benefit of the corporation. Wieboldt’s alleged insolvency after the LBO left Wieboldt with insufficient unencumbered assets to sustain its business and ensure payment to its unsecured creditors. Wieboldt therefore commenced this action on behalf of itself and its unsecured creditors, seeking to avoid the transactions constituting the LBO on the grounds that they are fraudulent under federal and state fraudulent conveyance laws.

II. FACTS

A. PARTIES

1. Wieboldt

William A. Wieboldt began operating Wieboldt in Chicago as a dry goods store in 1883. Mr. Wieboldt’s business prospered and diversified. In 1907 Wieboldt was incorporated under Illinois law. Wieboldt’s business continued to expand. In 1982 Wieboldt’s business was operated out of twelve stores and one distribution center in the Chicago metropolitan area. 1 At that time, Wieboldt employed approximately 4,000 persons and had. annual sales of approximately $190 million. Its stock was publicly traded on the New York Stock Exchange.

During the 1970’s, demographic changes in Wieboldt’s markets, increased competition from discount operations, and poor management caused Wieboldt’s business to decline. Wieboldt showed no profit after 1979 and was able to continue its operations only by periodically selling its assets to generate working capital. These assets included its store in Evanston, Illinois and some undeveloped land.

2. Defendants

Wieboldt brings this action against 119 defendants. These defendants can be grouped into three non-exclusive categories: (1) controlling shareholders, officers and directors; (2) other shareholders of Wieboldt’s common stock who owned and tendered more than 1,000 shares in response to the tender offer (“Schedule A shareholders”); and (3) entities which loaned money to fund the tender offer,

a. Controlling Shareholders, Officers and Directors

The individuals and entities who controlled Wieboldt in 1982 became controlling shareholders' as a direct or indirect result of a 1982 takeover effort. At some time prior to or during 1982, Julius and Edmond Trump, each citizens of the Republic of South Africa and permanent residents of New York, purchased 30% of Wieboldt’s outstanding shares by launching a takeover. After the takeover, the Trump brothers conveyed approximately one-half of these shares to Jerome Schottenstein and, directly or indirectly, to certain persons and entities affiliated with Mr. Schot-tenstein (collectively referred to as the “Schottenstein interests”). 2 As a result of *494 these transactions, the Schottenstein interests and the Trump brothers (through its agent, MBT Corporation) (collectively referred to as the “Trump interests”) each owned approximately 15% of Wieboldt’s then outstanding shares and became Wie-boldt’s controlling shareholders. 3

Wieboldt’s Board of Directors consisted of nine individuals. In late 1982, Mr. Schottenstein became the Chairman of the Board. He nominated Irving Harris, George Kolber, and Myron Kaplan to serve as directors. William W. Darrow, Robert A. Podesta, and David C. Keller also began serving in 1982. In 1984, MBT Corporation nominated James Jacobson and Albert Roth to the Wieboldt Board of Directors. These nine individuals served on the Board until December 19, 1985.

b. Schedule A Shareholders ■

In addition to the Schottenstein and Trump interests, Wieboldt had a number of shareholders as of December 20, 1985 who owned more than 1,000 shares of Wie-boldt’s common stock. Wieboldt has listed these shareholders and the number of shares that they held on that date on a schedule which they have appended to their complaint (“Schedule A”). 4 Directors Keller, Podesta and Darrow (the “insider shareholders”) also owned more than 1,000 shares each. 5

c. The LBO Lenders and Related Entities

On November 20, 1985 WSI commenced a tender offer for all outstanding shares of Wieboldt’s common stock, for all of Wie-boldt’s outstanding shares of preferred stock, and for all outstanding options to purchase Wieboldt’s stock. The tender offer was financed through three related financial transactions between Wieboldt and certain lenders and affiliated parties. These three transactions effected the LBO of Wieboldt.

Wieboldt has included as defendants in this action four of the entities which were involved in these financial transactions: One North State Street Limited Partnership (“ONSSLP”), State Street Venture (“SSV”), Boulevard Bank National Association (“Boulevard Bank”), BA Mortgage and International Realty Corporation (“BAMIR-CO”), and General Electric Credit Corporation (“GECC”). 6 The roles these entities played in the tender offer and subsequent buyout are described below.

B. THE TENDER OFFER AND RELATED TRANSACTIONS

By January, 1985 Wieboldt’s financial health had declined to the point at which the company was no longer able to meet its obligations as they came due. On January 23, 1985 WSI sent a letter to Mr. Schotten-stein in which WSI proposed a possible tender offer for Wieboldt common stock at $13.50 per share. The following day, Mr. Schottenstein informed Wieboldt’s Board of Directors of the WSI proposal and the Board agreed to cooperate with WSI in evaluating the financial and operating records of the company. WSI proceeded to seek financing from several lenders, including Household Commercial Financial Services (“HCFS”).

During 1985 it became apparent to Wie-boldt’s Board that WSI would accomplish its tender offer by means of an LBO through which WSI would pledge substantially all of Wieboldt’s assets, including the company’s fee and leasehold real estate assets, as collateral. Many of these real estate assets already served as collateral for $35 million in secured loan obligations from Continental Illinois National Bank (“CINB”) and other bank creditors. Wie- *495 boldt was at least partially in default on these obligations at the time of the LBO.

In order to free these assets for use as collateral in obtaining tender offer financing, WSI intended to sell the One North State Street property and pay off the CINB loan obligations. In furtherance of these efforts, WSI entered into a joint venture with Bennett & Kahnweiler Associates (“BKA”), a real estate broker. WSI and BKA intended to sell the One North State Street property to a partnership for $30,-000,000. The partnership would then mortgage the property to a funding source. Accordingly, BKA applied for and BAMIR-CO accepted a first mortgage term loan on the property.

The sale of the One North State Street property did not generate sufficient funds to pay off the CINB loan obligations. Consequently, WSI sought additional funds from GECC through the sale of Wieboldt’s customer charge card accounts. GECC agreed to enter into an accounts purchase agreement after WSI acquired Wieboldt through the tender offer. One term of the accounts purchase agreement required Wieboldt to pledge all of its accounts receivable to GECC as additional security for Wieboldt’s obligations under the agreement.

Thus, by October, 1985 HCFS, BAMIR-CO, and GECC had each agreed to fund WSI’s tender offer, and each knew of the other’s loan or credit commitments. 7 These lenders were aware that WSI intended to use the proceeds of the financing commitments to (1) purchase tendered shares of Wieboldt stock; (2) pay surrender prices for Wieboldt stock options; or (3) eliminate CINB loan obligations.

The Board of Directors was fully aware of the progress of WSI’s negotiations. The Board understood that WSI intended to finance the tender offer by pledging a substantial portion of Wieboldt’s assets to its lenders, and that WSI did not intend to use any of its own funds or the funds of its shareholders to finance the acquisition. Moreover, although the Board initially believed that the tender offer would produce $10 million in working capital for the company, the members knew that the proceeds from the LBO lenders would not result in this additional working capital.

Nevertheless, in October, 1985 the Board directed Mr. Darrow and Wieboldt’s lawyers to work with WSI to effect the acquisition. During these negotiations, the Board learned that HCFS would provide financing for the tender offer only if Wie-boldt would provide a statement from a nationally recognized accounting firm stating that Wieboldt was solvent and a going concern prior to the planned acquisition and would be solvent and a going concern after the acquisition. Mr. Darrow informed WSI that Wieboldt would only continue cooperating in the LBO if HCFS agreed not to require this solvency certificate. HCFS acceded to Wieboldt’s demand and no solvency certificate was ever provided to HCFS on Wieboldt’s behalf.

On November 18, 1985 Wieboldt’s Board of Directors voted to approve WSI’s tender offer, and on November 20, 1985 WSI announced its offer to purchase Wieboldt stock for $13.50 per share. 8 By December 20, 1985 the tender offer was complete and WSI had acquired ownership of Wieboldt through its purchase of 99% of Wieboldt’s stock at a total price of $38,462,164.00. All of the funds WSI used to purchase the tendered shares were provided by HCFS and were secured by the assets which BA-MIRCO and GECC loan proceeds had freed from CINB obligations. After the LBO,

1. Wieboldt’s One North State Street property was conveyed to ONSSLP *496 as beneficiary of a land trust established with Boulevard Bank as trustee;

2. Substantially all of Wieboldt’s re- - maining real estate holdings were subject to first or second mortgages to secure the HCFS loans; and

3. Wieboldt’s customer credit card accounts were conveyed to GECC and Wieboldt’s accounts receivable were pledged to GECC as security under the GECC accounts purchase agreement.

In addition, Wieboldt became liable to HCFS on an amended note in the amount of approximately $32.5 million. 9 Wieboldt did not receive any amount of working capital as a direct result of the LBO.

On September 24, 1986 certain of Wie-boldt’s creditors commenced an involuntary liquidation proceeding against Wieboldt under Chapter 7 of the United States Bankruptcy Code (“the Code”). On the same day, Wieboldt filed a voluntary reorganization proceeding pursuant to Chapter 11 of the Code. Wieboldt’s Chapter 11 proceeding is entitled In re Wieboldt Stores, Inc., 68 B.R. 578 (Bankr.N.D.Ill.1986) and is pending on the docket of Bankruptcy Judge Susan Pierson DeWitt of the United States Bankruptcy Court for the Northern District of Illinois.

C. THE COMPLAINT

In its complaint, Wieboldt alleges that WSI’s tender offer and the resulting LBO was a fraudulent conveyance under the federal bankruptcy statute and the Illinois fraudulent conveyance laws. Counts I, III, and V are based on Section 548(a)(1) of the Code, 11 U.S.C. § 548(a)(1). The essence of Count I is that the controlling and insider shareholders tendered their shares to WSI in response to WSI’s offer with the actual intent to hinder, delay or defraud Wie-boldt’s unsecured creditors. Count III brings a similar claim against the State Street defendants for their role in the sale of the One North State Street property. Likewise, Count V, which names GECC as defendant, claims that the pledging of Wie-boldt’s customer charge card accounts and other accounts receivable violated Section 548(a)(1).

Counts II, IV, VI, and VII are based on Section 548(a)(2) of the Code, 11 U.S.C. § 548(a)(2). Counts II and VII allege that the tender offer to Wieboldt shareholders (including the Schedule A shareholders) was a fraudulent conveyance because it and the resulting LBO “rendered Wieboldt insolvent or too thinly capitalized to continue in the business in which it was en-gaged_” (Complaint ¶¶ 113, 139). Count IV claims that the sale of the One North State Street property violated Section 548(a)(2); Count VI claims that the pledging of Wieboldt’s accounts receivable violated Section 548(a)(2).

Count VIII alleges that each of the three transactions (the tender offer, the sale of One North State Street property, and the pledging of the Wieboldt accounts receivable) violated the Illinois fraudulent conveyance law, Ill.Rev.Stat. ch. 59, § 4. The essence of the claim in Count VIII is that Wieboldt did not receive fair consideration for the property it conveyed and was insolvent at the time of the conveyances. (Complaint 11144). 10 In each of Counts I through VIII, Wieboldt seeks to avoid the transfer of assets made to the named defendants as a result of the LBO.

Finally, Counts IX, X and XI allege that the Board of Directors breached its fiduciary duty and violated Section 9.10(c)(1) of the Illinois Business Corporation Act (“IBCA”) by cooperating in and approving the LBO notwithstanding its practical effect on Wieboldt’s solvency and future as a going concern. Counts IX, X and XI seek $100 million in compensatory damages and the costs of bringing this lawsuit. In addi *497 tion, Count X seeks $500 million in punitive damages from the directors.

III DISCUSSION

A. RULE 12(b)(2) MOTIONS TO DISMISS

Several of the Schedule A defendants have filed motions to dismiss under Rule 12(b)(2) for lack of personal jurisdiction. 11 These defendants first contend that Bankruptcy Rule 7004(d), which provides for nationwide service of process in adversary bankruptcy proceedings, does not apply in civil actions brought under the Federal Rules of Civil Procedure. 12 However, amended Bankruptcy Rule 1001 makes the Bankruptcy Rules applicable to all cases and proceedings under Title 11 of the United States Code, whether before a district judge or a bankruptcy judge. See Bankr. Rule 1001 advisory committee note. Thus, Rule 7004(d) applies in this action.

These defendants also object to the application of Rule 7004(d) on the ground that a rule which permits nationwide service of process violates due process. The concept of due process requires that a defendant have certain “minimum contacts” with a forum such that “maintenance of the suit does not offend traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945). Defendants maintain that Rule 7004(d) violates the Constitution because it provides for nationwide service of process regardless of whether a party has minimum contacts with the forum state.

The Seventh Circuit has previously stated that in a federal question case where Congress has provided for nationwide service of process, minimum contacts between the defendant and the forum state is not required. Fitzsimmons v. Barton, 589 F.2d 330, 333 (7th Cir.1979). Although Fitzsimmons involved a case brought under Section 27 of the Security Exchange Act of 1934, 15 U.S.C. § 78aa (1976), the court quoted the broad language of the Supreme Court in United States v. Union Pacific R.R., 98 U.S. 569, 25 L.Ed. 143 (1878), to support its proposition:

There is ... nothing in the Constitution which forbids Congress to enact that, as to a class of cases or a case of special character, a circuit court—any circuit court—in which the suit may be brought, shall, by process served anywhere in the United States, have the power to bring before it all the parties necessary to its decision.

Id. 98 U.S. at 603-04. This conclusion has been applied specifically to uphold the validity of nationwide service of process under Rule 7004(d). In re Van Huffel Tube Corp., 71 B.R. 145, 146 (Bankr.N.D.Ohio 1987); In re Allegheny, Inc., 68 B.R. 183, 187 (Bankr.W.D.Pa.1986); In re Self, 51 B.R. 683, 685 (Bankr.N.D.Miss.1985); In re B.W. Development Co., Inc., 49 B.R. 129, 131-32 (Bankr.W.D.Ky.1985).

This court sees no reason to reach the opposite conclusion. Each of these defendants resides in the United States and therefore has national minimum contacts. Rule 7004(d) therefore does not violate due process by permitting this court to exercise jurisdiction over these parties for the purposes of this proceeding.

B. RULE 9(b) MOTIONS TO DISMISS

Certain moving defendants argue that Wieboldt’s claims do not satisfy the requirements of Fed.R.Civ.P. 9(b). Rule 9(b) provides that:

in all averments of fraud or mistake the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other con *498 ditions of mind of a person may be averred generally.

Rule 9(b) principles have been used to dismiss fraudulent conveyance claims which failed to meet the requirements of the Rule. See e.g., Atlanta Shipping Corp., Inc. v. Chemical Bank, 631 F.Supp. 336, 347-48 (S.D.N.Y.1986). However, a court must read Rule 9(b) in harmony with Fed. R.Civ.P. 8, which requires only a “short and plain statement of the claim showing that the pleader is entitled to relief.” Tornera v. Galt, 511 F.2d 504, 508 (7th Cir.1975).

Courts generally evaluate averments of fraud in the bankruptcy context more liberally than in other civil actions charging fraud. In re Hollis & Co., 83 B.R. 588, 590 (Bankr.E.D.Ark.1988); In re O.P.M. Leasing Services, Inc., 32 B.R. 199, 203 (Bankr.S.D.N.Y.1983); In re McGuff, 3 B.R. 66, 70 (Bankr.S.D.Cal.1980). To determine whether a pleading satisfies Rule 9(b), a court must consider the purposes of the rule:

Complaints alleging fraud should seek redress for a wrong rather than attempting to discover unknown wrongs. Moreover, defendants must be protected from the harm that results from charges of serious wrongdoing, as well as the harm that comes to their reputations when they are charged with the commission of acts involving moral turpitude. Finally, allegations of fraud must be concrete and particularized enough to give notice to the defendants of the conduct complained of, to enable the defendants to prepare a defense. [Citations omitted.]

D & G Enterprises v. Continental Illinois National Bank, 574 F.Supp. 263, 266-67 (N.D.Ill.1983). See also McKee v. Pope Ballard Shepard & Fowle Ltd., 604 F.Supp. 927, 930 (N.D.Ill.1985). A court must consider these principles in light of the Supreme Court’s admonition that a complaint should be dismissed for failing to state a claim only when it appears beyond doubt that plaintiff cannot, under any set of facts, support the claim. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); In re McGuff, 3 B.R. 66, 70 (Bankr.S.D.Cal.1980).

The allegations of Wieboldt’s complaint are well within the pleading requirement of Rule 9(b). Wieboldt’s detailed and comprehensive complaint recites 107 paragraphs of supporting facts. Paragraphs 43 through 107 explain in detail the events surrounding the tender offer and the LBO. These paragraphs describe each defendant’s participation in the LBO transaction, the effect of the LBO on Wieboldt after the transactions were complete, and the assets involved in the transactions. In addition, Wieboldt states clearly in each count the factual and legal basis for the claim in that count and the defendants against whom the claim is brought.

Although the size and complexity of this case renders pleading difficult, Wieboldt has included enough information in its complaint and has stated its claims with sufficient clarity to advise each defendant or group of defendants of the claims made against them. Pleadings are not intended to supplant the process of discovery; nor is Wieboldt required to plead the evidence it plans to present to support its claims. Wieboldt’s complaint adequately describes the specific injury Wieboldt seeks to redress and describes the legal theories upon' which it bases its claims. For these reasons and because the complaint pleads sufficient facts to allow each defendant to prepare an effective answer or defense, defendants’ motions to dismiss under Rule 9(b) are denied.

C. RULE 12(b)(6) MOTIONS TO DISMISS

The controlling shareholders, insider shareholders, Schedule A shareholders, and the State Street defendants move to dismiss the complaint on the grounds that Wieboldt has failed to state a claim under either the federal or the state fraudulent conveyance laws. In addition, the board of directors seek dismissal of the counts against them because Wieboldt has failed to state a claim for breach of fiduciary duty. Each of these assertions are discussed below.

The standard for dismissal under Rule 12(b)(6) is well established. In deciding whether to dismiss a complaint under Fed. *499 R.Civ.P. 12(b)(6), the court must accept the allegations of the complaint as true and must view the allegations in the light most favorable to the plaintiff. Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); The Marmon Group, Inc. v. Rexnord, 822 F.2d 31, 34 (7th Cir.1987). “A complaint should be dismissed for failure to state a claim only if it appears beyond doubt that the plaintiff is unable to prove any set of facts that would entitle the plaintiff to relief....” Doe v. St. Joseph’s Hospital, 788 F.2d 411, 414 (7th Cir.1986).

1. Applicability of Fraudulent Conveyance Law

Both the federal Bankruptcy Code and Illinois law protect creditors from transfers of property that are intended to impair a creditor’s ability to enforce its rights to payment or that deplete a debtor’s assets at a time when its financial condition is precarious. Modern fraudulent conveyance law derives from the English Statute of Elizabeth enacted in 1570, the substance of which has been either enacted in American statutes prohibiting such transactions or has been incorporated into American law as a part of the English common law heritage. See Sherwin, “Creditors’ Rights Against Participants in a Leveraged Buyout,” 72 Minn.L.Rev. 449, 465-66 (1988).

The controlling shareholders, insider shareholders, and some of the Schedule A shareholders argue that fraudulent conveyance laws do not apply to leveraged buyouts. These defendants argue (1) that applying fraudulent conveyance laws to public tender offers effectively allows creditors to insure themselves against subsequent mismanagement of the company; (2) that applying fraudulent conveyance laws to LBO transactions and thereby rendering them void severely restricts the usefulness of LBOs and results in great unfairness; and (3) that fraudulent conveyance laws were never intended to be used to prohibit or restrict public tender offers.

Although some support exists for defendants’ arguments, 13 this court cannot hold at this stage in this litigation that the LBO in question here is entirely exempt from fraudulent conveyance laws. Neither Section 548 of the Code nor the Illinois statute exempt such transactions from their statutory coverage. Section 548 invalidates fraudulent “transfers” of a debt- or’s property. Section 101(50) defines such a transfer very broadly to include “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest.” 11 U.S.C. § 101(50). Likewise, the Illinois statute applies to gifts, grants, conveyances, assignments and transfers. Ill.Rev.Stat. ch. 59, 114. The language of these statutes in no way limits their application so as to exclude LBOs.

In addition, those courts which have addressed this issue have concluded that LBOs in some circumstances may constitute a fraudulent conveyance. See e.g., Kupetz v. Continental Illinois National Bank and Trust, 77 B.R. 754 (Bankr.C.D. Cal.1987), aff'd Kupetz v. Wolf, 845 F.2d 842 (9th Cir.1988) (applying Section 548 and the California statute, West’s Ann.Cal.Civ. Code ¶¶ 3439-3439.12); In re Ohio Corrugating Company, 70 B.R. 920 (Bankr.N.D. Ohio 1987) (applying Section 548 and the Ohio statute, Ohio Rev.Code, Sect. 1336.01 et seq.); In re Anderson Industries, Inc., 55 B.R. 922 (Bankr.W.D.Mich.1985) (applying Michigan law, M.C.L.A. § 566.11); and United States v. Gleneagles Investment Co., Inc., 565 F.Supp. 556 (M.D.Pa.1983), aff'd in part and remanded in part United States v. Tabor Court Realty, 803 F.2d 1288 (3rd Cir.1986), cert. denied, McClellan Realty Co. v. United States, — U.S. -, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987) (applying the Pennsylvania Uniform Fraudulent Conveyances Act, 39 P.S. § 351). See also Sherwin, “Creditor’s Rights Against Participants in a Leveraged Buyout,” 72 Minn.L.Rev. 449 (1988). Defendants have *500 presented no case law which holds to the contrary. 14

The court is aware that permitting debtors to avoid all LBO transfers through the fraudulent conveyance laws could have the effect of insuring against a corporation’s subsequent insolvency and failure. Anderson Industries, Inc., 55 B.R. at 926; see also Baird & Jackson, supra n. 11 at 839. In light of the case law and the broad statutory language, however, this court sees no reason to hold as a general rule that LBOs are exempt from the fraudulent conveyance laws. As the court stated in Anderson, “[i]f this holding is too broad in the light of the present marketplace, it is the legislature, not the courts, that must narrow the statute.” 55 B.R. at 926.

2. The Structure of the Transaction

Although the court finds that the fraudulent conveyance laws generally are applicable to LBO transactions, a debtor cannot use these laws to avoid any and all LBO transfers. In this case, certain defendants argue that they are entitled to dismissal because the LBO transfers at issue do not fall within the parameters of the laws. These defendants argue that they are protected by the literal language of Section 548 of the Code and the “good faith transferee for value” rule in Section 550. 15 They contend, initially, that they did not receive Wieboldt property during the tender offer and, secondarily, that, even if they received Wieboldt property, they tendered their shares in good faith, for value, and without the requisite knowledge and therefore cannot be held liable under Section 550.

The merit of this assertion turns on the court’s interpretation of the tender offer and LBO transactions. Defendants contend that the tender offer and LBO were composed of a series of interrelated but independent transactions. They assert, for example, that the transfer of property from HCFS to WSI and ultimately to the shareholders constituted one series of several transactions while the pledge of Wie-boldt assets to HCFS to secure the financing constituted a second series of transactions. Under this view, defendants did not receive the debtor’s property during the tender offer but rather received WSI’s property in exchange for their shares.

Wieboldt, on the other hand, urges the court to “collapse” the interrelated transactions into one aggregate transaction which had the overall effect of conveying Wie-boldt property to the tendering shareholders and LBO lenders. This approach requires the court to find that the persons and entities receiving the conveyance were direct transferrees who received “an interest of the debtor in property” during the tender offer/buyout, and that WSI and any other parties to the transactions were “mere conduits” of Wieboldt’s property. If the court finds that all the transfers constituted one transaction, then defendants received property from Wieboldt and Wie-boldt has stated a claim against them.

Few courts have considered whether complicated LBO transfers should be evaluated separately or collapsed into one integrated transaction. However, two United States Courts of Appeals opinions provide some illumination on this issue. *501 See Kupetz v. Wolf, 845 F.2d 842 (9th Cir.1988); United States v. Tabor Court Realty, 803 F.2d 1288 (3rd Cir.1986), cert. denied McClellan Realty Co. v. United States, — U.S. -, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987).

In Kupetz, the debtor corporation (Wolf & Vine) was owned in equal shares by an individual, Morris Wolf, and the Marmon Group. When Mr. Wolf retired, Marmon decided to sell the company and concluded that David Adashek was a suitable buyer. Mr. Adashek subsequently obtained control of the company through a series of transactions which constituted an LBO. 16 Thereafter, Wolf & Vine could not service the additional debt that resulted from the buyout. The company eventually filed for bankruptcy under Chapter 11 of the Code.

The dispute before the district court resulted when the trustee in bankruptcy sought to avoid the LBO transfers on the grounds that the manner in which the sale was financed constituted a fraudulent conveyance to Mr. Wolf and the Marmon Group. After the case proceeded to a jury trial, the district court directed a verdict in favor of the selling shareholders on the fraudulent conveyance claims. 845 F.2d at 844-45. The trustees appealed.

The Ninth Circuit affirmed the district court’s decision and declined to strike down the LBO on fraudulent conveyance grounds. The court concluded that the trustee could not avoid the transfer to the shareholders because (1) they did not sell their shares in order to defraud Wolf & Vine’s creditors; (2) they did not know that Mr. Adashek intended to leverage the company’s assets to finance the purchase of shares; and (3) the LBO had the indicia of a straight sale of shares and was not Wolf & Vine’s attempt to redeem its own shares. 17 845 F.2d at 848-50. However, the Ninth Circuit in its opinion in Kupetz stated:

In an LBO, the lender, by taking a security interest in the company’s assets, reduces the assets available to creditors in the event of failure of the business. The form of the LBO, while not unimportant, does not alter this reality. Thus, where the parties in an LBO fully intend to hinder the general creditors and benefit the selling shareholders the conveyance is fraudulent under [the fraudulent conveyance laws].

845 F.2d at 846.

In Kupetz the Ninth Circuit discussed shareholder liability under the fraudulent conveyance laws. The Third Circuit in United States v. Tabor Court, 803 F.2d 1288 (3rd Cir.1986), cert. denied McClellan Realty Co. v. United States, — U.S. -, 107 S.Ct 3229, 97 L.Ed.2d 735 (1987), addressed the liability of an LBO lender. 18 In Tabor Court, the controlling shareholders of the debtor corporation (Raymond Group) solicited a purchaser for the company. The purchaser formed a holding company (Great American) to purchase Raymond Group’s outstanding shares. Great American acquired Raymond Group by borrowing funds from a third party lender (IIT) and securing the loan with both first and second mortgages on Raymond Group’s assets. 19 After the company failed and many *502 of its assets had been sold to various investment groups, the United States government sought to reduce to judgment certain tax liens on Raymond Group’s property and satisfy the judgments out of assets which the company owned before it mortgaged those assets to secure the LBO funds. 803 F.2d at 1291-94.

The Third Circuit affirmed the district court’s conclusion that the mortgages that the Raymond Group gave to IIT were fraudulent conveyances within the meaning of the constructive and intentional fraud sections of the Pennsylvania UFCA. 803 F.2d at 1296. In affirming the district court, the Third Circuit noted that all three parties — the lender, the debtor, and the purchaser — participated in the loan negotiations, and that IIT therefore knew of the purpose to which Great American intended to put the loan proceeds. Id. The court held that the district court, in interpreting the LBO, correctly integrated the series of transactions because the Raymond Group merely served as a conduit for the transfer between IIT and Great American (and ultimately to the shareholders), and did not receive the funds as any form of consideration. 803 F.2d at 1302.

Neither of these cases involved transactions which were identical to the WSI-Wie-boldt buyout. However, the Kwpetz and Tabor Court opinions are nonetheless significant because the courts in both cases expressed the view that an LBO transfer— in whatever form — w