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United States v. Singer Co.

decided as amended.: November 22, 1989.

UNITED STATES OF AMERICA, EX REL; TAXPAYERS AGAINST FRAUD; CHRISTOPHER URDA, PLAINTIFFS-APPELLEES
v.
THE SINGER COMPANY, DEFENDANT-APPELLANT, LINK FLIGHT SIMULATION CORPORATION; CAE-LINK CORPORATION, DEFENDANTS-APPELLEES; UNITED STATES OF AMERICA, EX REL; TAXPAYERS AGAINST FRAUD; CHRISTOPHER URDA, PLAINTIFFS-APPELLEES V. THE SINGER COMPANY, DEFENDANT-APPELLANT, LINK FLIGHT SIMULATION CORPORATION; CAE-LINK CORPORATION, MESA HOLDINGS LIMITED PARTNERSHIP, DEFENDANTS-APPELLEES V. UNITED STATES OF AMERICA, EX REL; TAXPAYERS AGAINST FRAUD; CHRISTOPHER URDA, PLAINTIFFS-APPELLEES V. MESA HOLDINGS LIMITED PARTNERSHIP, DEFENDANT-APPELLANT, LINK FLIGHT SIMULATION CORPORATION, CAE-LINK CORPORATION, THE SINGER COMPANY, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the District of Maryland, at Baltimore. Herbert F. Murray, Senior District Judge. CA-88-3408-HM.

Murnaghan, Sprouse, and Chapman, Circuit Judges.

Author: Murnaghan

MURNAGHAN, Circuit Judge

The Singer Company has been the subject of a recent highly leveraged buy out. There has also been initiated a qui tam complaint against Singer. The United States, claiming $77,000,000 under the False Claims Act, 31 U.S.C. § 3729, which may be trebled (i.e., $231,000,000) and also may be increased upon further investigation of the facts by the government, sought and obtained a preliminary injunction from the United States District Court for the District of Maryland, Judge Herbert F. Murray presiding, on May 25, 1989.*fn1

The preliminary injunction required Singer to obtain court review and approval of non-ordinary-course-of-business transactions to prevent Singer, without court awareness, from further liquidating or distributing its assets.

The appeal was expedited by order of June 14, 1989.*fn2 In addition, both Singer and Mesa Holdings Limited Partnership ("Mesa")*fn3 appeal from an order issued on June 30, 1989, which denied Singer's motion, filed May 30, 1989, in the district court asking it to review and approve three transactions. Singer sought approval (1) of a payment of $81 million, plus accrued interest, to Mesa and Shearson Lehman Brothers Holdings, Inc. ("Shearson");*fn4 (2) of a payment of quarterly dividends when they were due to ripen on its $3.50 cumulative preferred stock; and (3) of a sale of its SimuFlite division to any person unrelated to Singer on such terms as the Singer Board of Directors should determine to be reasonable.

On June 28, 1989, the court held a hearing on Singer's motion seeking such approval, at which time Mesa's motion to intervene was granted. On June 30, 1989, the court denied Singer's motion for approval and, on July 11, 1989, set forth its reasons. Singer and Mesa filed notices of appeal on June 30, 1989 and July 5, 1989, respectively, and the appeals were consolidated with the appeal of the preliminary injunction.*fn5

The preliminary injunction was granted in connection with an ongoing lawsuit of the United States against Singer, Link Flight Simulation Corp. ("Link Flight"),*fn6 and CAE-Link Corp. ("CAE-Link"). In its first amended complaint filed on March 14, 1989, following the unsealing of the qui tam complaint brought by two relators, the United States alleged that Link Flight had engaged in a long-term scheme between 1980 and 1988 to defraud the government in the negotiation of sole-source, fixed price contracts with the Department of Defense.*fn7 Link Flight failed to disclose certain contingency costs designed to offset price reductions expected to occur during negotiations with the government, in violation of its obligation to bid its "best estimate" of the costs to perform the contract.*fn8 See 48 C.F.R. § 15.804-6 (1988). Two former Link Flight employees stated that the purpose of the hidden reserves -- referred to internally as the "negotiation loss" or "management reserve" -- was to offset the anticipated price reductions that would occur during negotiations with the government's contracting officials,

The government seeks, inter alia, treble damages pursuant to the False Claims Act, 31 U.S.C. §§ 3729 et seq., totaling at least $231 million. The damages are based on documents obtained from Link Flight which show a total of $77 million in undisclosed negotiation loss reserves.*fn9

The government moved for a preliminary injunction when it became concerned that Singer, which had been successfully targeted for a leveraged buyout,*fn10 was quickly liquidating its divisions to pay off the acquisition debt incurred in connection with the takeover. Before the takeover in early 1988, Singer had assets of approximately $1.58 billion and shareholders' equity of $633 million (as of December 31, 1987). About a year later, following the takeover and divestiture of a majority (9) of its divisions (including Link Flight), Singer's assets had decreased to $445 million and its shareholders' equity had fallen to $80 million.

The government requested the preliminary injunction because more divestiture was planned and not all of the acquisition debt had been repaid.*fn11

In September of 1988, Bilzerian, on behalf of Singer, called for the repurchase of the Class B and Class C common stock. Disagreement arose as to the valuation of the takeover profits. As settlement, Mesa agreed to take $20.4 million and Shearson $9.6 million.*fn12 The agreement also permitted Mesa to take control of Singer's board of directors if the redemption of Mesa's stock did not occur before July 1, 1989.*fn13

Discussion

1. The District Court Had the Power to Issue the Preliminary Injunction

The district court's memorandum dated May 24, 1989, which was adopted on the following day as the court's reasoning for its grant of the preliminary injunction, carefully addressed the issue of its power to issue the preliminary injunction. In sum, it concluded that the Supreme Court case relied on by Singer, De Beers Mines v. United States, 325 U.S. 212, 89 L. Ed. 1566, 65 S. Ct. 1130 (1945), was distinguishable and that the situation presented here was more closely aligned with those described in Deckert v. Independence Shares Corp., 311 U.S. 282, 85 L. Ed. 189, 61 S. Ct. 229 (1940), and United States v. First National City Bank, 379 U.S. 378, 13 L. Ed. 2d 365, 85 S. Ct. 528 (1965).*fn14

Judge Murray's application of the general principles as explained in his memorandum is far from flawed. Preliminary injunctions are permitted in situations such as the one presented here where the plaintiff alleged that the principal defendant was "insolvent and threatened with many law suits, that its business [was] virtually at a standstill because of unfavorable publicity, that preferences to creditors [were] probable, and that its assets [were] in danger of dissipation and depletion." Deckert, 311 U.S. at 285.*fn15

Moreover, Singer's assertion that the district court erred in finding a realistic threat of insolvency fails in view of the clearly erroneous standard of review and the evidence substantially supporting those findings. The district court did not err in considering the ad damnum demands in other suits in assessing the threat of insolvency. See Deckert, 311 U.S. at 285; cf. Tri-Continental Leasing Corp., Inc. v. Zimmerman, 485 F. Supp. 495, 499-500 (N.D.Cal. 1980) (under California Uniform Fraudulent Conveyance Act, pending lawsuits are existing debts for the purpose of determining solvency). ...


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