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
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
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 (
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
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
amm.com, Sept. 25).