Miller et al v. MSX-IBS Holdings, Inc. et al

Filing 30

OPINION and ORDER denying plaintiffs' MOTION for Summary Judgment 22 and granting defendants' MOTION for Summary Judgment 23 Signed by District Judge George Caram Steeh. (MBea)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
RALPH L. MILLER, as Trustee
of the Kyung Ae Bae Trust under
Trust Agreement date October 16, 1989
between Kyung Ae Bae as Settlor and
Kyung Bae as Trustee, and KYUNG AE BAE,
as Trustee of the Kyung Ae Bae Trust
under Trust Agreement date October 16, 1989
between Kyung Ae Bae as Settlor
and Kyung Bae as Trustee,
Plaintiffs,
Case No. 09-CV-15046
v.
HON. GEORGE CARAM STEEH
MSX-IBS HOLDING, INC.,
a Delaware corporation, and
MSX INTERNATIONAL, INC.,
a Delaware corporation.,
Defendants.
_____________________________________/
OPINION AND ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY
JUDGMENT AND GRANTING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
Plaintiffs Ralph Miller and Kyung Ae Bae, in their capacity as the trustees of the
Kyung Ae Bae Trust (the “Trust”), filed this suit to compel defendants MSX International,
Inc. (“International”) and/or MSX-IBS Holding, Inc. (“IBS”) to redeem the IBS Series A
preferred stock owned by the Trust. On November 30, 2011, the parties filed crossmotions for summary judgment. Responses to the motions were filed on January 9, 2012
and replies were filed on January 20, 2012. Oral argument occurred at a hearing on this
motion on February 6, 2012. For the reasons that follow, the court GRANTS defendants’
motion for summary judgment and DENIES plaintiffs’ motion for summary judgment.

BACKGROUND
IBS is a Delaware corporation that is a holding company. IBS has no operations of
its own and its only asset is the stock of its wholly-owned subsidiary, International.
International went through a corporate restructuring in March 2007. Pursuant to that
restructuring, International became a subsidiary of IBS. International is a provider of
outsourced integrated business solutions focused primarily on warranty management,
dealer process improvement, and human capital solutions to automobile and truck OEMs,
dealers, suppliers, and ancillary service providers.
Miller was an executive employee of International when it was formed in 1997. His
employment was terminated in 1999. Miller obtained common and preferred stock of
International during his employment and he transferred his stock in International to the
Trust. As a result of the restructuring, the Trust now holds common and preferred stock
in IBS, but none in International.
This is the third lawsuit filed by plaintiffs relating to the Trust’s stock. The first lawsuit
was filed in 2001, before the restructuring and when the Trust held stock in International.
Plaintiffs sued several defendants, including International, in Oakland County Circuit Court.
Defendants frame the action as one seeking to force the purchase of all International stock
owned by the Trust. Plaintiffs frame the action as one seeking a determination of which
shares of Trust stock had vested when Miller’s employment at International was terminated
and which shares International had the right to redeem at that time. The case was settled.
Pursuant to the settlement agreement, a designee of one of the defendants bought threefifths of the International common stock owned by the Trust and the Trust retained
ownership of two-fifths of its common stock and all of its preferred stock. The settlement
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agreement also provides that the defendants would not change International’s certificate
of incorporation “to decrease the dividend rate, reduce or diminish the accrual, payment
terms, or stated value, or extend the date of redemption” set forth in the certificate with
respect to the Trust’s preferred stock without the consent of the Trust.
In 2007, International restructured. It had approximately $250 million in debt that
was to become due in 2007 and 2008. Had the debt not been refinanced, International was
facing possible bankruptcy. In order for International to refinance the debt, the lenders
required that International move some of the debt and all of the preferred stock to a holding
company.
In order to accomplish the restructuring, International and IBS entered into a merger
agreement. Before the restructuring, IBS was a wholly-owned subsidiary of International.
After the restructuring, International was a wholly-owned subsidiary of IBS. The merger
agreement also provided that the stock of International would be cancelled and converted
into new stock of IBS with identical rights to the stock previously issued by International.
All stockholders of International became stockholders of IBS, with the stock of IBS having
identical rights to the stock of International prior to the merger. Prior to this restructuring,
International amended its certificate of incorporation to push back the redemption date for
all preferred stock other than that held by the Trust to May 1, 2027. The amendment
provided that “nothing herein shall impair the rights of the parties to that certain Settlement
Agreement dated August 16, 2002 to the extent they have such rights and remain holders
of the Preferred Stock.” The same provision regarding no rights under the settlement
agreement being impaired is included in the certificate of incorporation for IBS. Thus, with
respect to the preferred stock held by the Trust, the redemption date remained December
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31, 2008, subject to the requirement that funds be legally available for the redemption.
After the restructuring, plaintiffs again sued International and other parties to the
settlement agreement in Oakland County Circuit Court, alleging that the settlement
agreement had been breached as a result of the restructuring. The court granted summary
disposition to the defendants, and the Michigan Court of Appeals affirmed. The Court of
Appeals held that “defendants did not ‘decrease the dividend rate, reduce or diminish the
accrual, payment terms, or stated value, or extend the date of redemption set forth in...the
Certificate with respect to the Trust’s Series A preferred stock’ when it replaced the stock
with MSX-IBS preferred stock.” Miller v. MSX International, Inc., 2009 WL 2382632, *2
(Mich. App. Aug. 4, 2009). The court concluded “that plaintiffs, as they did before, had the
option to redeem their stock, ‘to the extent that funds are legally available,’ any time after
December 31, 2008, and thus, plaintiffs’ redemption rights were not affected when
[International] amended its certificate of incorporation.” Id.
On December 19, 2008, the IBS Board met via telephone to determine whether the
Trust’s shares could be redeemed on December 31, 2008. The Board was advised on the
subject by legal counsel who laid out the requirements for being able to redeem stock. The
Board first considered the consolidated balance sheet of IBS as of November 23, 2008.
The balance sheet was for IBS and all of its direct and indirect subsidiaries.

The

consolidated balance sheet reflected total long term debt of approximately $263 million.
This amount consisted of approximately $205 million of bond debt that is an obligation of
International, with the balance of approximately $59 million relating to notes that are an
obligation of IBS. Overall, the balance sheet showed a deficit of $214 million. The Board
was advised by counsel that this did not meet the Delaware test for redemption. These
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numbers did not include the preferred stock as a liability. If the preferred stock was
counted as a liability, the deficit would have been $355 million.
The Board also considered an analysis prepared by Plante & Moran, PLLC that was
an Appraisal of the Fair Market Value of the Preferred and Common Stock of MSX-IBS as
of September 30, 2008.

The appraisal was done in connection with the possible

development of a management incentive plan and was based on the operating results of
International. The appraisal valued the company at negative $34 million. (Ex. 9 to
Defendants’ Mot., p. 26.) The value does not include the debt of $59 million owed by IBS.
Based on the information presented, including the consolidated financials and the Plante
& Moran appraisal, and guided by the legal standard set forth by counsel, the Board
concluded that funds to redeem the Trust’s shares were not legally available. Miller was
informed of the Board’s conclusion that IBS could not redeem the Trust’s preferred stock.
Plaintiffs then filed this lawsuit.
On July 13, 2011, during the course of the pending litigation, the IBS Board
(consisting of four different directors than the 2008 board), again looked at the financial
condition of IBS to determine whether it could redeem the Trust’s preferred stock. Guided
by the standard explained to it by legal counsel, the Board considered: (i) the company’s
balance sheet, (ii) another analysis prepared by Plante & Moran, an Impairment Testing
Procedures Pursuant to ASC Topic 350-20 as of September 30, 2010, (iii) a Letter of Intent
from Dekra AG to purchase International dated March 20, 2009, and (iv) information
regarding International’s bonds.
As of July 2011, IBS’s liabilities totaled $80 million, increasing because the interest
on the notes owed by IBS is added to the principal and not paid until maturity. As in 2008,
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the only asset of IBS was the International stock. Thus, without treating the preferred stock
as a liability, the fair market value of the International stock would have to be greater than
$80 million for IBS to have had a surplus and its capital not impaired.
The 2010 Plante & Moran report concluded that the estimated fair market value of
International was approximately negative $9 million. The negative $9 million value does
not take into account IBS’s liabilities of approximately $80 million.
The Board also considered an acquisition offer made in 2009 by Dekra AG, a large,
multi-national corporation that includes business units similar to International’s businesses.
Dekra offered to purchase all of the shares of International for $150-175 million, excluding
the debt of $205 million. This indicated that an independent third party had concluded that
the company was worth less than its debt.
The Board also considered reports from legal counsel regarding the International
bonds. Two of the largest holders of the bonds valued the company at less than $10
million, and two other large bondholders did not think International had any net value.
Either way, the indicated value of International, the only asset of IBS, was much less than
the $80 million debt owed by IBS. Counsel also reported that trading prices on the bonds
implied a valuation of International of approximately $175 million, again not enough to pay
off the International debt, much less the IBS debt in addition.
The Board was also aware that International’s $205 million debt matures on April 1,
2012. International has been seeking to refinance, restructure, or otherwise modify the
terms of its obligation with respect to this debt because International does not have the
ability to satisfy this obligation when it matures. The Board knew that as of July 13, 2011,
the efforts had been unsuccessful.

If the bonds cannot be refinanced, IBS and
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International will have no choice but to file for bankruptcy. Based on the updated financial
information and guidance from counsel, the Board concluded that funds were not legally
available to redeem the Trust’s preferred stock.
In their motion for summary judgment, defendants argue the undisputed facts show
that the Board of Directors of IBS properly determined that the corporation has no surplus
and, therefore, plaintiffs’ preferred stock in the corporation cannot be redeemed under
Delaware law. Defendants also argue that summary judgment should be granted to
International as plaintiffs have asserted no valid claim against International. Defendants
argue International cannot be held liable because: (1) the stock at issue is IBS stock; (2)
the IBS Board of Directors made the decision regarding redemption; and (3) International
cannot be held liable merely because it is a subsidiary of IBS. In their response, plaintiffs
agree to the dismissal of International from this lawsuit but stress the separation of parent
from subsidiary further supports their view that International’s bond debt should not be
considered as a liability of IBS. Based on plaintiffs’ agreement, the court GRANTS
defendants’ motion for summary judgment as to International.
Plaintiffs, in their motion for summary judgment, argue IBS has funds legally
available to redeem the Trust’s Series A preferred stock because IBS’s financial statements
show that its assets exceed its liabilities by nearly $100 million (if the preferred stock is not
treated as a liability). Plaintiffs argue the Board improperly relied on consolidated financial
statements and valuations which included the debt of International, which plaintiffs argue
IBS is not obligated to pay. Plaintiffs therefore argue the redemption of the Trust’s
preferred stock will not impair the capital of IBS and is therefore proper.

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STANDARD FOR SUMMARY JUDGMENT
Federal Rule of Civil Procedure 56(c) empowers the court to render summary
judgment forthwith if the “pleadings, depositions, answers to interrogatories and admissions
on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as a matter of law." See
Redding v. St. Eward, 241 F.3d 530, 532 (6th Cir. 2001). The Supreme Court has affirmed
the court's use of summary judgment as an integral part of the fair and efficient
administration of justice. The procedure is not a disfavored procedural shortcut. Celotex
Corp. v. Catrett, 477 U.S. 317, 327 (1986).
The standard for determining whether summary judgment is appropriate is "'whether
the evidence presents a sufficient disagreement to require submission to a jury or whether
it is so one-sided that one party must prevail as a matter of law.'" Amway Distributors
Benefits Ass’n v. Northfield Ins. Co., 323 F.3d 386, 390 (6th Cir. 2003) (quoting Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). The evidence and all reasonable
inferences must be construed in the light most favorable to the non-moving party.
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). "[T]he
mere existence of some alleged factual dispute between the parties will not defeat an
otherwise properly supported motion for summary judgment; the requirement is that there
be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original).
If the movant establishes by use of the material specified in Rule 56(c) that there is
no genuine issue of material fact and that it is entitled to judgment as a matter of law, the
opposing party must come forward with "specific facts showing that there is a genuine issue
for trial." First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 270 (1968); see also McLean
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v. 988011 Ontario, Ltd., 224 F.3d 797, 800 (6th Cir. 2000). Mere allegations or denials in
the non-movant's pleadings will not meet this burden, nor will a mere scintilla of evidence
supporting the non-moving party. Anderson, 477 U.S. at 248, 252. Rather, there must be
evidence on which a jury could reasonably find for the non-movant. Id.
ANALYSIS
A Delaware corporation cannot redeem stock “when the capital of the corporation
is impaired or when such purchase or redemption would cause any impairment of the
capital of the corporation.” 8 Del. C. §160. In SV Inv. Partners, LLC v. ThoughtWorks, Inc.,
--- A.3d ---, 2011 WL 5547123 (Del. Nov. 15, 2011), the Delaware Supreme Court
considered this prohibition against any redemption that impairs a company’s capital. In that
case, the parties had agreed to a right of redemption, subject to funds being legally
available. Following a demand for redemption, the defendant’s board sought the advice
of legal counsel and financial advisors and ultimately concluded that any further redemption
would have impaired the company’s capital. The Delaware Chancery Court found that the
board had acted reasonably and the Delaware Supreme Court affirmed.
“Capital is impaired ‘if the funds used in the repurchase exceed the amount of the
corporation's ‘surplus,’ defined by 8 Del. C. §154 to mean the excess of net assets over the
par value of the corporation's issued stock.’” Id. at *4, quoting Klang v. Smith’s Food &
Drug Ctrs., Inc., 702 A.2d 150, 153 (Del. 1997). “Net assets means the amount by which
total assets exceed total liabilities.” 8 Del. C. §154. The ThoughtWorks court found “[a]s
provided by Section 160(a)(1), unless a corporation redeems shares and retires them to
reduce its capital, ‘a corporation may use only its surplus for the purchase of shares of its
own capital stock.’” 2011 WL 5547123, *4, quoting In re Int’l Radiator Co., 92 A.255, 256
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(Del. Ch. 1914). The court recognized the statutory purpose of protecting creditors and the
long-term health of the corporation. Id. The court then found:
When a board decides on the amount of surplus available to make
redemptions, its decision is entitled to deference absent a showing that the
board: (1) acted in bad faith, (2) relied on unreliable methods and data, or (3)
made determinations so far off the mark as to constitute actual or
constructive fraud.
Id. at *4. In Klang, the court utilized the same standard in finding “[i]n the absence of bad
faith or fraud on the part of the board, courts will not ‘substitute [our] concepts of wisdom
for that of the directors.’” 702 A.2d at 156. The Klang court noted that Delaware law “does
not require any particular method of calculating surplus, but simply prescribes factors that
any such calculation must include.” Id. at 155.
Defendants argue the IBS Board did exactly what it was supposed to do under these
circumstances: obtain outside legal advice and evaluate financial information that reflected
the fair value of the company’s assets. The Board reviewed the company’s balance sheets,
as well as financial reports by an accounting firm and an acquisition offer from a company
in the same industry. The Board was aware that the debt of its sole asset, its subsidiary
International, would become due in April 2012, that neither International nor IBS has the
means to pay the debt when it becomes due, and that, to date, the efforts to renegotiate
the debt or refinance it have failed. Defendants thus argue the Board’s decisions were
reasonable.
Plaintiffs’ arguments are based on the idea that International’s financials should not
be considered in determining whether IBS has funds available to redeem the shares.
Plaintiffs argue the Board should have considered the stand-alone balance sheets of IBS,
which show assets exceed liabilities. Plaintiffs argue these balance sheets are party
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admissions. Plaintiffs also cite Minturn’s testimony that IBS and International were solvent
in May 2007. Plaintiffs note IBS’s debts will not mature until May 4, 2013 and May 4, 2014
and that IBS has not guaranteed the debts of International and is not “legally obligated to
pay the debts owed by any of its subsidiaries.” Plaintiffs also cite Minturn’s testimony that
none of the IBS companies asked any creditor for permission to lend cash to IBS in order
to redeem the Trust’s preferred stock. As a result of this evidence, plaintiffs argue IBS has
a substantial surplus and has more than sufficient funds to redeem the Trust’s preferred
stock.
However, in making their stand-alone balance sheet argument, plaintiffs ask this
court to do exactly what the Delaware Supreme Court rejected in Klang. In Klang, the
court, in reviewing a capital impairment claim, stated “plaintiff asks us to adopt an
interpretation of 8 Del. C § 160 whereby balance-sheet net worth is controlling for purposes
of determining compliance with the statute.” 702 A.2d at 154. The court recognized that
“the books of a corporation do not necessarily reflect the current values of its assets and
liabilities” and that “[i]t is unrealistic to hold that a corporation is bound by its balance sheets
for purposes of determining compliance with Section 160.” Id.
Moreover, Minturn attests that the stand-alone balance sheet provides no reliable
information about the actual value of IBS assets. As explained in Minturn’s affidavit and
during his deposition, the entry on the May 27, 2007 unaudited IBS balance sheet relied
on by plaintiffs showing assets of $168 million is no reflection of the value of that asset,
which is the International stock. Instead, it is simply the dollar amount of the obligations
that IBS assumed in connection with the restructuring. It reflects the transfer of the
preferred stock ($118 million), two loans ($50 million), and some stock warrants ($750,000)
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from International to IBS when the restructuring took place. While that was a proper
accounting treatment for the investment in International, the $168 million of assumed
obligations had nothing to do with the value of the stock at the time or now. Plaintiffs fail
to address this fatal problem with relying on the stand-alone balance sheet.
Plaintiffs admit that in order for a Delaware corporation to legally make a redemption,
its net assets must exceed its total liabilities. The only asset of IBS is the stock of
International. To determine the value of the asset, one must assess the value of the stock
of International. See Morris v. Standard Gas & Elec. Co., 63 A.2d 577 (Del. Ch. 1949)
(explaining that, to determine if the utility holding company had a surplus allowing the
payment of dividends, the board properly assessed the value of the various stocks owned
by the company). Defendants argue that to determine the value of the International stock,
one must consider the amount of debt owed by International. The experts who performed
valuations that were presented to and relied on by the Board, the company that submitted
an offer to buy International excluding its debt, and the Board all recognized that the debt
must be considered in evaluating the value of International.
As further support, defendants cite legal authority providing that consolidated
financial statements can be more meaningful than a stand-alone financial statement. The
Financial Accounting Standards Board’s Accounting Standards Codification provides:
The purpose of consolidated financial statements is to present, primarily for
the benefit of the owners and creditors of the parent, the results of operations
and the financial position of a parent and all its subsidiaries as if the
consolidated group were a single economic entity. There is a presumption
that consolidated financial statements are more meaningful than separate
financial statements and that they are usually necessary for a fair
presentation when one of the entities in the consolidated group directly or
indirectly has a controlling financial interest in the other entities.

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FASB ASC ¶ 810-10-1. Plaintiffs fail to submit legal authority providing that the Board was
required to consider only stand-alone balance sheets or was prohibited from considering
consolidated financial information.
Plaintiffs also attempt to poke holes in the evidence submitted by defendants.
Plaintiffs note that the Plante & Moran valuation was prepared in connection with a
management incentive plan and was to be used “for no other purpose”. However, plaintiffs
fail to explain how the valuation is unreliable or why it should not have been considered by
the Board. Plaintiffs simply argue it inappropriately considers International’s financials.
Plaintiffs state that the Dekra proposal and second Plante & Moran valuation, both
presented at the July 13, 2011 board meeting, were not produced in discovery. Defendants
represent that the Plante & Moran report was produced and provide the production number
for the document. The documents were referenced in the excerpt of the board meeting
minutes produced and if plaintiffs needed additional time or discovery they could have
requested it.
Plaintiffs also attempt to distinguish Klang and ThoughtWorks, arguing that in both
of those cases the boards attempted to maximize the value of the company in order to
comply with the corporation’s redemption obligations to its shareholder.

Under the

standard set forth in Klang and ThoughtWorks, plaintiffs have the burden of showing that
the Board acted in bad faith, relied on unreliable methods and data, or made
determinations so far off the mark as to constitute actual or constructive fraud. Plaintiffs
have failed to do so. Plaintiffs argue the Board improperly relied on consolidated financial
information but provide no legal authority for the argument that it was improper for the
Board to consider such information. As IBS’s sole asset is its stock in International, the
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value of International appears key to the analysis. Plaintiffs also argue the Board’s
decisions are not entitled to deference because the Board did not engage in “deliberative”
analysis. Plaintiffs provide no legal authority regarding the type of analysis necessary for
a Board’s actions to constitute “deliberative” analysis. Moreover, the minutes from the
board meetings suggest complete consideration of the factors required by law. Plaintiffs
also provide no factual support for their argument that IBS has the surplus required to
redeem the Trust’s preferred stock, aside from stand-alone balance sheets proven
defective by Minturn’s testimony. The court therefore concludes that there is no genuine
issue of fact that, in performing its duties under Delaware law, the Board did not act in bad
faith, rely on unreliable methods or data, or engage in actual or constructive fraud in
determining there was no surplus available to redeem the Trust’s preferred stock. The
evidence has shown that the Board’s decisions were reasonable. Summary judgment for
defendants is therefore appropriate.1
CONCLUSION
For the reasons set forth above, plaintiffs’ motion for summary judgment is DENIED
and defendants’ motion for summary judgment is GRANTED.
Dated: February 13, 2012
S/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE

1

As summary judgment for defendants is appropriate, the court need not consider
the additional evidence (expert reports) and arguments (failure to meet “available cash”
and “ability to pay its debts as they become due” requirements of Thoughtworks)
submitted by defendants.
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CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
February 13, 2012, by electronic and/or ordinary mail.
S/Josephine Chaffee
Deputy Clerk

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