Coram Equity Committee Asks Bankruptcy Court for Permission to Sue Major Debt Holder Cerberus and Its Principal Steven A. Feinberg
WILMINGTON, Del.--(BUSINESS WIRE)--Feb 6, 2001--
- Committee alleges undisclosed conflict of interest between CEO
Crowley and Cerberus caused substantial injury to Coram;
Seeks damages and removal of CEO from board -
The Equity Committee for Coram Healthcare Corporation (OTCBB:CRHEQ) today asked the U.S. Bankruptcy Court for the District of Delaware for permission on behalf of Coram to sue Stephen A. Feinberg, principal of the company's largest debt holder, Cerberus Partners LLP and related Cerberus entities, as well as the company's Chairman, President and CEO Daniel D. Crowley, for breach of fiduciary duties.
This breach, the Equity Committee said, was the result of an "impermissible conflict of interest" that was created by Feinberg to induce Crowley to secretly manage Coram for the benefit of Cerberus and other note holders and to the detriment of its shareholders. By conspiring to run the company exclusively for debt holders' benefit, the committee charged that Feinberg caused "significant monetary damage" to the company and should pay compensatory and punitive damages to shareholders. The other note holders who are not named as proposed defendants are Goldman Sachs Credit Partners LLP and Foothill Capital Corporation.
The Equity Committee said it needed permission from the bankruptcy court to file a complaint seeking damages on behalf of Denver-based Coram, one of the nation's largest home infusion companies. The committee, which is opposing the company's reorganization plan, said that it would also ask for removal of Crowley from the Coram board of directors. The lawsuit was filed on behalf of the equity holders by Richard F. Levy, attorney for the Equity Committee and a partner in Chicago-based Altheimer & Gray.
The Equity Committee's proposed complaint, which was attached to the request for permission, charged that the conflicts of interest arising from the secret compensation agreements between Crowley and Feinberg had tainted the reorganization process under the company's Chapter 11 filing submitted August 8, 2000. The Committee noted that the court had acknowledged this conflict of interest when it failed to approve the company's reorganization plan in December. As a result of the secret agreements, the Equity Committee alleged that the company's business and cash flow were seriously damaged in numerous ways including missed business opportunities, strategic mismanagement and misallocation of cash to debt holders.
Specifically, the complaint alleges that Crowley and Feinberg breached their fiduciary duties to Coram because Crowley was in the pay of Cerberus pursuant to an undisclosed employment agreement which paid him more than $1 million per year, plus the opportunity for substantial bonuses. Upon becoming a director of Coram in May 1998, Feinberg is alleged to have initiated a plan to divert all of Coram's available cash flow to repayment of an estimated $250 million in notes held by Cerberus. To implement this plan, Cerberus, acting through Feinberg, employed Crowley to work full-time for Cerberus and then persuaded Coram's board to also hire him, initially as a consultant, and later, as Chairman, CEO and president.
Upon hiring Crowley in August 1998, Feinberg urged Coram's board, of which he was a member, to also hire Crowley's consulting company, Dynamic Health Care Solutions, as a consultant to Coram. The substantial fees paid by Coram to Dynamic were additional hidden compensation for Crowley, the complaint said. Further, Feinberg, acting as a director of Coram and chairman of the compensation committee, negotiated and executed a $13 million incentive increase in Crowley's compensation from Coram.
As a result of these arrangements, the complaint asserts that Crowley used his position as chairman and CEO to run Coram in a manner designed principally to benefit Cerberus without regard to any injury caused to Coram shareholders. Among the actions that Crowley and Feinberg, acting together, took that were harmful to Coram:
- Adopting a business strategy that focused on liquidation of assets
and reduction of debt even when such actions were adverse to the
interests of Coram. Weeks before Coram's chapter 11 filing, for
example, they caused the company to make substantial cash interest
payments to Cerberus and other Note holders that were not required
to be made.
- Failure to take appropriate steps to preserve the stockholder
equity of Coram so that it could comply with federal health care
regulations regarding Medicare and Medicaid payments.
- Sale of Coram Prescription Services, one of the company's
operating units, at a price far below the value estimated by
Coram's investment banker, Deutsche Bank Alex Brown.
- Failure to explore opportunities for business combinations,
capital infusions and strategies to grow the company
The complaint further alleges that Coram's decision to file for bankruptcy was part of a deliberate scheme to wipe out the public equity holders and convert Coram into a privately-held company in order to remain in compliance with federal health care regulations. These regulations, commonly known as "Stark II", make it unlawful for a physician to refer patients for certain designated health services reimbursable by Medicare and Medicaid to an entity with which the physician has a financial relationship. "Stark II" includes an exception for a physician's ownership of publicly traded securities if, among other things, the company has stockholders equity exceeding $75 million as of the end of the most recent fiscal year. Early last year, it became evident to Crowley that Coram, given its deteriorating finances, would no longer qualify for this exception as of the end of 2000. To deal with the problem, and to secure the future value of Coram for Cerberus and the two other note holders, Goldman Sachs Credit Partners and Foothill Capital Corporation, Crowley filed for bankruptcy despite the fact that the company was far from insolvent. The proposed plan of reorganization would have wiped out the public shareholders equity, allowing Coram to emerge from Chapter 11 with the note holders in control of a private company. This would solve the "Stark II" problem because no referring physicians would be shareholders of Coram and thus no physician referrals would contravene Coram's "Stark II" obligations.
Background
Coram filed a voluntary petitions with the federal bankruptcy court under Chapter 11 last August, submitting a reorganization plan that would have given all of its equity to its debt holders. In October, the U.S. Trustee for the bankruptcy court appointed the Equity Committee to represent the interests of shareholders in the Chapter 11 petition. In December, the court said that it would not confirm the company's plan of reorganization because there was a conflict of interest arising from the fact that Crowley was in the pay of Cerberus pursuant to the aforementioned concealed employment agreement.
Cerberus is a limited partnership whose business includes large investments in high-risk, high yield debt instruments of troubled companies. Cerberus is the holder of" "Series A" and "Series B" Notes issued by Coram, which are by far the company's largest obligations. Stephen A. Feinberg is the managing director of Cerberus Associates L.L.C., which is the general partner of the defendant and he was a member of Coram's board of directors from the summer of 1998 until July 24, 2000.
CONTACT:
Equity Committee Contacts:
Richard F. Levy
Altheimer & Gray
312/715-4600
or
Stern & Co.
Stephanie Stern/Stan Froelich
212/888-0044
KEYWORD: DELAWARE COLORADO |
