Private equity firms risk losing key advantage in legal scrapes
Lawsuits spilling out of New York bankruptcy court and Delaware Chancery Court, report says
A pair of little-noticed court cases are stoking anxiety at US buyout firms, with experts saying they could pave the way for hefty payouts in legal scrapes over some of the industry’s most controversial practices.
That’s because the lawsuits are spilling out of the New York bankruptcy court and Delaware Chancery Court — private equity’s long-preferred legal enclaves for settling its disagreements quietly.
In one dispute, ex-executives at freight-management company Ceva Logistics allege that partners at private-equity giant Apollo Global Management encouraged them to buy bigger stakes in Ceva, but then bilked them out of their shares in a complex debt-for-equity swap as the company went bankrupt.
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In the second, William West, a co-founder of security-badge maker Access Control Related Enterprises, or ACRE, alleges that Philadelphia-based buyout firm LLR improperly "orchestrated" his ouster from the company in December 2015 and wrongfully took his shares, just days before he was due for a year-end bonus.
Both cases are textbook complaints about hardball tactics in private equity. But how they’re playing out — and, more specifically, where — has taken an unusual turn.
In the Ceva dispute, New York bankruptcy Judge James Garrity in early 2018 threw out former Ceva executive Michael McEvoy’s case, ruling that his claim wasn’t separate from the overall bankruptcy. But McEvoy appealed, and US Judge Jed Rakoff ruled that since his claim was based on the employee incentive plan and not the bankruptcy and that all Ceva managers allegedly were not treated equally in the bankruptcy, an argument could be made for a separate trial.
Judge Garrity, in turn, transferred McEvoy’s suit to Florida for a possible jury trial. Likewise, a judge has ordered that West can move his wrongful-termination case against LLR out of Delaware Chancery Court and instead pursue a jury trial in his home state of California.
n each instance, McEvoy and West, respectively, had objected to their cases being tried in legal venues that have long histories of case law and settlements through non-jury "bench trials" and arbitration. Now, insiders say, that decades-old arrangement is being thrown into question.
"It goes without saying that an employer-defendant would generally prefer a bench trial while an employee-plaintiff would prefer a jury trial," Los Angeles County Superior Court Judge David J. Cowan wrote in his surprise decision in West’s case against LLR last July. But Cowan ruled that would deprive West of his right to a jury trial.
Judge Cowan’s ruling marks the first time that employment-contract language requiring that such a dispute be heard in Delaware Chancery Court has been upended, according to lawyers for West. Their client is seeking punitive and compensatory damages including the more than $15 million in equity he claims he lost with his unfair ouster.
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In late February, a state appeals court denied buyout firm LLR’s request to stop a Los Angeles court from scheduling a trial, setting the stage for a May 2022 trial in California — a state with a reputation as a plaintiff’s paradise where civil juries routinely dole out huge verdicts against big business. On May 5, Los Angeles Superior Court Judge Kevin Brazile dismissed LLR’s motion to delay the trial until Delaware ruled on the matter, according to court papers.
"There is insufficient basis for the court to conclude West will have an adequate jury trial in Delaware at this time," the judge ruled.
Legal insiders say buyout firms coast to coast are anxiously waiting to see what happens. Judge Cowan’s decision in the West case "add[s] uncertainty as to whether Delaware entities can rely on the Court of Chancery being their forum of choice," attorneys at white-shoe law firm Ropes & Gray, who aren’t directly involved, wrote in a memo last fall.
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In the Ceva case, plaintiffs allege that executives at Apollo strongly encouraged management at Ceva’s predecessor company, the Jacksonville, Fla.-based trucking giant TNT Logistics, to invest in the 2007 deal. Apollo also eventually bought some of the loans TNT took to finance the buyout, and when the renamed Ceva Logistics in 2013 filed for bankruptcy, Apollo arranged a debt-for-equity exchange that left it in control of Ceva, court papers allege.
McEvoy claims he has found documents through discovery that show those holding equity stakes in the company were not treated equally. Specifically, he claims Ceva execs who stayed with the company got to keep some of their equity after the bankruptcy, while others like him lost all their money. Apollo, now helmed by CEO Marc Rowan, last year got some of the suit dismissed.
"We believe this case has no merit and intend to vigorously defend ourselves against it," an Apollo spokeswoman said.
In West’s dispute, he alleges that his company ACRE was a fast-growing business when LLR took control of it in 2013, with clients including Rockefeller Center and Prudential. But two years later, it was the lone bright spot in LLR’s investment fund, according to court papers, and the buyout firm allegedly pushed to extract cash from ACRE through a so-called "dividend recap."
West and one of his co-founders expressed concern the move would cripple ACRE’s finances. When they instead offered to buy the company back, LLR allegedly fired West, accusing him of disclosing confidential financial data — a claim West calls "preposterous."
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LLR in March sold ACRE to the Triton Funds. If LLR made a profit in the sale, West may be able to claim further damages, according to a source close to the case.
LLR did not respond to requests for comment.