CFM creditors committee asks court to recharacterize, subordinate indirect parent's claims

By Caroline Salls

Pittsburgh, Sept. 12 - CFM U.S. Corp.'s official committee of unsecured creditors filed a lawsuit Friday against the Ontario Teachers Pension Plan Board, also known as Teachers Private Capital, that asks the U.S. Bankruptcy Court for the District of Delaware to recharacterize Teachers Private's $297.57 million in secured claims as equity interests and subordinate and disallow some of its debt in light of fraudulent transfer allegations.

According to the committee's complaint, Teachers Private Capital operates Canada's largest pension plan, and, through its 2005 acquisition of CFM Corp., indirectly owns and controls the company.

In early 2005, the committee said Teachers Private "embarked on a series of disastrous investments involving CFM Corp. that would ultimately result in hundreds of millions of dollars in losses to Teachers Private Capital."

In addition, the committee said CFM was never financially able to make any interest payments on the series A and series C debentures issued to Teachers Capital by subsidiary 1650150 Ontario, Inc., and "Teachers Private Capital was forced to invest money in CFM Corp. in order to maintain day-to-day operations."

The committee said the true nature of Teachers Capital's subordinated debt was not a secured loan, but an equity contribution by a 99% owner. As a result, the committee said Teachers Capital's debt should be classified as equity.

The committee said Teachers Private acquired CFM "in the midst of a severe financial decline that had begun more than 12 months before," and the debenture debt rendered CFM insolvent at the close of the acquisition.

Although CFM tried to improve its financial condition after the sale, the committee said the company's performance continued to decline under Teachers Private's control.

The committee alleged in the lawsuit that Teachers Private participated in an "orchestrated campaign to mislead" CFM's creditors about its financial condition.

In addition, the committee said the indirect parent never treated the company's subordinated debt as a true debt obligation.

"Repayment of the Teachers Private Capital subordinated debt was entirely dependent upon a successful restructure and turnaround of the debtors' business and growing that business in the future," the committee said in its complaint.

Also, the committee said the company granted security interests in its real properties to its senior debt agent in connection with the refinancing of its senior debt.

However, because the agent was acting as collateral agent not only for CFM's senior debt facility, but also for Teachers Private Capital, the committee alleged the security interest transfers resulted in Teachers Private Capital obtaining a free lien and security interest in CFM's real property.

The committee said CFM received nothing from Teachers Private in connection with the transfers.

The committee said Teachers Private's claims should be subordinated to a level below other creditors because of the alleged fraudulent transfers.

Based in Huntington, Ind., CFM designs, develops, manufactures and distributes hearth and heating products. The company filed for bankruptcy on April 9. Its Chapter 11 case number is 08-10668.

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