by Gay MennutiRenco Penalty in MagCorp Bankruptcy Row Rises to $213M
By Kurt Orzeck, Law 360 Published: March 16, 2015
Ira Rennert and his company, Renco Corp., will have to pay a total of roughly $213 million for allegedly taking shareholder dividends from bankrupt Magnesium Corp. of America, sources told Law360 on Monday, after a New York federal judge added interest to a jury’s previous award to Magnesium’s trustee.
U.S. District Judge Alison J. Nathan ordered the defendants to make up for missed interest payments on MagCorp debt by paying 6 percent interest per annum from August 2001 — when MagCorp and its parent, Renco Metal, filed for bankruptcy — to March 2015. The interest applies to the $101 million that a jury said Renco must return after deciding last month that the dividends were fraudulent conveyances.
Plaintiffs had argued for the New York statutory rate of 9 percent, while defendants contended that — if prejudgment interest had to be applied — it should be fixed at a federal post-judgment interest rate that would amount to roughly .25 percent. Judge Nathan replied Monday that a 9 percent rate would have been unlikely during the financial crisis that occurred during the time frame at issue.
Instead, she held that a 6 percent rate of return would be equitable, saying it strikes a balance between the need to compensate continued noteholders without providing an unfair windfall for entities who bought the notes at a bankruptcy-related discount. That would amount to just under $96 million if the judgment is entered this week, sources told Law360.
“This rate exceeds the rate of inflation, and therefore serves to ensure plaintiffs’ damages award does not lose absolute value because of the intervening period between the bankruptcy and the judgment and provides a modest but reasonable rate of return on any investment of the funds,” her decision said.
The case has put a spotlight on Rennert, an industrial magnate 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 made a rare public appearance on the stand to defend his stewardship of MagCorp, which operated from a Rowley, Utah, facility that wrung magnesium out of brine dredged from the Great Salt Lake.
The verdict reached the conclusion of a four-week trial, delivered a resounding win to Chapter 7 trustee Lee Buchwald in a tortured, 12-year legal saga and a windfall to the asset management firms now holding MagCorp’s defaulted bonds. Renco owned the Utah-based magnesium producer and allegedly extracted handsome dividends from 1996 and 1998 when the company was already beset with massive pollution liabilities and brutal overseas competition. The extractions allegedly left MagCorp too weak to survive.
Bondholders were left unpaid when MagCorp entered bankruptcy amid a glut of cheaper magnesium from Asia and a $900 million pollution lawsuit from the U.S. Environmental Protection Agency. Rennert’s lawyers denied wrongdoing and blamed MagCorp’s collapse on the economic recession and vicissitudes in the global magnesium market.
After a day and a half of deliberations, the jury on Friday found dividends that Renco allegedly extracted from MagCorp to be fraudulent conveyances and ordered the return of $101 million from Renco and $17.2 million from Rennert. The jury also leveled $1 million in punitive damages against Renco.
Earlier this month, Judge Nathan said she refused the defendant’s request for a mistrial because they had failed to make their argument on the grounds of a “dramatic inconsistency in the verdict” before the jury was dismissed.
A Renco spokesman told Law360 on Monday that they are disappointed by Judge Nathan’s interest-rate ruling, and fighting to have the jury verdict and damages award vacated.
“The jury verdict, which found that Renco Metals was solvent according to each test under the law and that Mr. Rennert acted in good faith, remains fundamentally irreconcilable,” the spokesman said.
Buchwald and his attorneys didn’t immediately respond to requests for comment late Monday.
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 LLPand Tai H. Park and Steven C. Bennett of Park Jensen Bennett LLP.
The case is Magnesium Corp. of America et al. v. Renco Group Inc. et al., case number1:13-cv-07948, in the U.S. District Court for the Southern District of New York.
by Gay MennutiMagCorp Trustee Kicks Off $118M Rennert Looting Trial
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 Hampton’s 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.