NEW YORK Creditors of bankrupt specialty scrap processor Keywell LLC are suing the companys executives for more than $65 million for allegedly engaging in "a pattern of improper self-dealing" that saw them "lining their own pockets to the detriment of Keywell and its creditors."
The lawsuit, filed by the official committee of unsecured creditors of Keywell LLC, is part of the Chicago-based processors bankruptcy proceedings in U.S. Bankruptcy Court in Illinois. The committeeconsisting of several creditors, including Fort Wayne, Ind.-based OmniSource Corp., Orange, Calif.-based SA Recycling LLC and Portland, Ore.-based Schnitzer Steel Industries LLClaid out its allegations in a 48-page complaint that names Keywell president and chief executive officer J. Mark Lozier and chairman Joel D. Tauber among the defendants.
The committee claims that after Keywell experienced a profitable 2007 fiscal year that saw it generate about $75.5 million in net income, the companys management "opted to distribute the remaining value in the enterprise to Keywells equity holders through massive dividends that would ultimately render Keywell insolvent." The suit cites nearly $40 million in "special distributions" in 2007, virtually all of which went to Keywell managementthe companys largest shareholders at the time.
That distribution, the suit claims, was made "with the full knowledge" that the company was required to make significant additional payments to shareholders in the form of tax distributions approaching $24 million that were paid in March 2008, which "rendered Keywell insolvent and substantially undercapitalized," with liabilities exceeding assets by more than $12 million.
The suit said that when Lozier, Tauber, chief financial officer Michael C. Sheffieck, executive vice president Philip Rosenberg and the companys other shareholders decided to pay the dividends, "they were deciding that they should pay themselves ... emptying the companys coffers in the hope that they would have positive future business results that could potentially support the exorbitant expenditure."
A source with knowledge of the bankruptcy proceedings said the lawsuit will not affect the $15.8-million purchase of Keywells assets by Southlake, Texas-based investment firm Prophet Equity LP, which was announced earlier this month (amm.com, Dec. 12). In a statement announcing the deal, Prophet Equity managing director Pelham Smith said the sale is scheduled to close by year-end, after which Keywell will operate under the name Keywell Metals LLC (amm.com,Dec. 16).
Lozier is expected to have a role in the new Keywell Metals management team, with Prophet Equity chief executive Ross Gatlin saying the firm is "excited to work alongside (Keywells) existing management team."
Keywell filed for Chapter 11 bankruptcy protection in Chicago Sept. 24 after months of cost reductions that saw the recycler close numerous facilities around the country and suspend scrap delivery payments (amm.com, Sept. 25).