Allied Systems Holdings is a car-hauling and car-delivery business that wasn’t in great shape heading into the global financial crisis, and which emerged from its first bankruptcy in 2007 – just in time for things to get worse.
Ron Burkle’s Yucaipa Companies stepped in with its American Alliance Fund I to support the company’s turnaround, but the Global Financial Crisis hit the auto industry hard, and ultimately Yucaipa’s plan to sell the business on fell through. Credit investors Black Diamond Capital Management and Spectrum Investment Partners bought up portions of Allied’s debt, and in May 2012 forced the company into involuntary bankruptcy proceedings. These are still pending.
So far, the deal has been through five separate courts inside of three years, as Yucaipa has continued to fight to salvage something from its investment.
While the allegations and insults being lobbed back and forth between Yucaipa and Black Diamond/Spectrum are not unusual for a contentious deal, a fresh suit filed in New York last month has added extra spice. Yucaipa has brought it under the Racketeer Influenced and Corrupt Organizations Act (RICO), which is typically reserved for bookies, mobsters and other conmen. Yucaipa is attempting to argue that RICO has relevance to how Black Diamond and Spectrum have gone about seeking to profit from Allied’s demise.
According to its complaint, the Yucaipa is seeking $175 million in damages for what it says has been an unlawful attempt to deny it its share of Allied’s bankruptcy proceeds. It cites “simple greed” as well as “secret agreements” between Black Diamond and Spectrum, claims it has been making against the two firms since the involuntary bankruptcy began back in 2012, and which were previously dismissed in other courts in Delaware and New York. A demand for a jury trial is also included.
Other parties noted in the RICO complaint include middle market broker CIT Group, which is named as the entity colluding with Black Diamond to push through its claims. CIT Group declined to comment on pending litigation, and Yucaipa’s attorney Gibson, Dunn & Crutcher did not respond to a request for comment at press time.
Gibson, Dunn & Crutcher is the fourth law firm representing Yucaipa in the case.
Schulte, Roth & Zabel is working with Black Diamond and Spectrum. Robert Ward, a partner with Schulte, Roth says he plans to have the RICO suit against his clients thrown out. He told PEI: “Now, having been disappointed in five different courts, Yucaipa is engaging in forum shopping in an attempt to evade the unfavourable decisions it received. The defendants intend to move vigorously and swiftly to have the claims […] dismissed. To date, the parties have litigated these same claims the New York Supreme Court, the New York Appellate Division, the New York Court of Appeals, the United States Bankruptcy Court for the District of Delaware, and the Delaware Chancery Court. In each, Yucaipa has been rebuffed by the court.”
Legal sources note that Yucaipa’s approach is unusual, and say proving a RICO case is hard and that the failure rate is high. Once Yucaipa’s case is decided, all eyes will revert back on the pending bankruptcy court proceeding. But if the judge sides with Yucaipa on any of its RICO claims, or if Black Diamond et al fail to get a motion to dismiss granted, it would establish precedent for other deals going to court in the future. US bankruptcy lawyers are eagerly awaiting the outcome.
The case is Yucaipa American Alliance Fund I LP et al v. Ehrlich et al., case number 1:15-cv-00916, US District Court for the Southern District of New York.