Pala moves closer to lawsuit with Castle Harlan

Pala Investments portfolio company Norcast is engaged in pre-litigation procedures regarding Castle Harlan’s $218m sale of Norcast Wear Solutions in July.

A US court has ruled that Castle Harlan must provide documents pertaining to the firm’s “quick flip” sale of Canadian mining company Norcast Wear Solutions to former portfolio company Bradken in July.

“We’re going to be able to get from Castle Harlan all the documents and information they have that will help us understand what actually happened so that we can make a determination as to what claims should be brought and against whom and where,” partner at law firm Chadbourne & Parke Scott Balber told Private Equity International, explaining the court decision.

Chadbourne is representing Pala Investments, which sold mining company Norcast Wear Solutions to Castle Harlan for $190 million on 6 July. Pala asserts that Castle’s sale of Norcast the next day for $218 million to Australian industrial company Bradken “suggests an improper relationship between Castle Harlan and Bradken under Australian law”, according to court documents. 

After learning of the quick flip by Castle Harlan, Pala hired Chadbourne & Parke and sought and obtained subpoenas which were served on Castle Harlan. The firm objected to the subpoenas in July, saying “we are highly confident of our legal position and would vigorously defend any action taken against us,” in a statement, but a New York court ruled last week that Castle would have to provide documents related to the transaction.

The circumstances surrounding Castle Harlan’s quick flip are rare in the private equity industry.

“It’s a very interesting case,” said David Wilf, a partner at law firm Gibson, Dunn & Crutcher, which is not involved in the pre-litigation procedures. “I have not seen a quick flip case like this, but I could certainly understand why a seller would be unhappy about this,” Wilf said. “On its face, it’s difficult to understand how the buyer could have resold it so fast without having shared confidential information.”

Castle Harlan declined to comment.

“I think what we’ll find is that Bradken was involved in the process behind the scenes with Castle Harlan from the very beginning, that Bradken was fully aware that this asset was being sold, fully understood that Bradken would have to pay a higher price as a strategic investor than Castle Harlan would have to pay as a financial investor and that Bradken used Castle Harlan as a shill to be able to obtain the asset for a reduced price,” Balber said.

No formal litigation has begun, but Pala and Norcast are understood to be pursuing a possible lawsuit as early as mid-December, the source said.

In August 2010, the Castle Harlan president Justin Wender resigned abruptly for undisclosed reasons. Castle Harlan appointed senior managing directors Howard Morgan and Bill Pruellage as co-presidents to take his place.

The firm has partnered with Bradken on several transactions in the past. In 2008, Castle Harlan sold AmeriCast Technologies to Bradken for $288 million, more than double its purchase price, after 21 months of ownership.