By Andrew Scurria, Law360 Published: February 2, 2015
Lawyers for a bankruptcy trustee accusing industrial magnate Ira Rennert of plundering $118 million from Magnesium Corp. of America told a Manhattan jury on Monday that dividends extracted by the billionaire’s Renco Group Inc. left MagCorp “doomed to fail” and creditors out of the money.
After seating a 10-person jury for the multiweek trial, U.S. District Judge Alison Nathan let attorneys for MagCorp’s Chapter 7 trustee present an opening statement outlining how they say Rennert drove the magnesium producer he owned into bankruptcy and wiped out its creditors.
More than a decade in the making, the lawsuit turns on a $150 million bond offering in 1996 that Rennert allegedly used to pay himself and his deputies while leaving MagCorp overleveraged and undercapitalized.
The trustee, Lee Buchwald, says that Rennert caused MagCorp to pay out improper dividends, stock redemption payments and executive compensation while the facility was struggling with the overseas competition and environmental liabilities that foretold its demise. MagCorp operated primarily from a Rowley, Utah, facility that produced magnesium out of brine dredged from the Great Salt Lake.
MagCorp entered bankruptcy in 2001, and “not one penny” of principal on the bond debt was repaid, the trustee’s attorney Leo R. Beus of Beus Gilbert PLLC told the jury.
“They could never get out from under that $150 million in debt,” Beus said. “Mr. Rennert made a bad business decision when he bought the facility … but he doesn’t take responsibility for that bad decision.”
The case has put a spotlight on Rennert, an industrialist who built Renco into a powerhouse conglomerate with holdings from the Rust Belt to South America by buying and selling distressed businesses, often in bankruptcy.
Perhaps best known for erecting a lavish and controversial 67,000-square-foot mansion in the Hamptons, Rennert is expected to make a rare public appearance on the stand during the three- to four-week trial. Rennert’s attorneys are scheduled to wrap up their opening statement Tuesday. They tried and failed to preclude the trustee from showing the jury photographs of the Hamptons residence.
In court papers, the trustee has accused Renco of seizing on a brief spike in magnesium prices to justify raising new debt in 1996. The bond offering allegedly doubled MagCorp’s long-term indebtedness and pushed its shareholders’ equity underwater by $81 million.
Rennert justified the offering based on predictions that magnesium prices would stay at record levels for years, but prices quickly dropped well below the $1.60 per pound that MagCorp needed to break even, according to the trustee.
The lawsuit contends that Rennert profited while knowing the company would soon be unable to service its bond debt or install badly-needed technology upgrades.
The final blow came in January 2001, when the U.S. Environmental Protection Agency sued MagCorp for $900 million in cleanup costs connected to the facility’s release of chlorinated hydrocarbons and other pollutants. MagCorp filed for Chapter 11 less than eight months later and subsequently converted the case to a liquidation.
The trustee sued Renco in 2003 along with other firms involved in the bond offering, including Renco’s law firm Cadwalader Wickersham & Taft LLP, accounting firm KPMG LLP and financial adviser Houlihan Lokey LLP.
In 2009, U.S. Bankruptcy Judge Robert E. Gerber cut Cadwalader, KPMG and Houlihan Lokey from the suit but refused to release Renco, Rennert or his deputies, whose compensation was allegedly tied to the improper dividends. The trustee then took his claims against the remaining defendants to federal court for trial.
The lawsuit brings claims for unjust enrichment and depends on a finding that MagCorp was inadequately capitalized or insolvent after taking on the new debt.
The trustee is represented by Leo R. Beus, Scot C. Stirling, Malcolm Loeb and Robert O. Stirling of Beus Gilbert PLLC.
Renco is represented by H. Peter Haveles Jr. and Jeffrey A. Fuisz of Kaye Scholer LLP;and Tai H. Park and Steven C. Bennett of Park Jensen Bennett LLP.
The case is Magnesium Corporation of America et al. v. The Renco Group Inc. et al., case number 1:13-cv-07948, in the U.S. District Court for the Southern District of New York.