January 24, 2002
Kalnows sue holding company
By Ryan Good
Staff Writer
rgood@advertiser-tribune.com
Andrew Kalnow and the Kalnow family are suing the controlling directors of the National Machinery Co., claiming they were purposely allowing the company to fail so it could be bought out at a cheaper price.
The suit, filed Wednesday afternoon in Seneca County Common Pleas Court, names the holding company for National as well as Citicorp Venture Capital of New York, which hold the controlling three seats on the board, as defendants.
National Machinery was closed at the end of last year by its creditor banks. The managers of the manufacturer of cold forging equipment at 161 Greenfield St. have been looking for ways to solve the financial problems.
Several entities have expressed interest in purchasing the company, including an investment group headed by Kalnow. He reported Sunday that the banks had rejected that bid in favor of a proposal from Citicorps Venture Capital.
Tiffin attorney Brent Howard, who filed the suit, Wednesday said "the Kalnow family hope for the revitalization of National," but, "I really at this point can't expand on what's in the complaint."
Messages left at the office of Andrew Kalnow and his attorneys in Chicago where not immediately returned.
The suit described the purchase of National Machinery by Citicorp Venture Capital in 1998 for $98 million from the Kalnow family and other stockholders. It says that during a leveraged recapitalization during 1998, NMC Holding Co. was established to hold all the capital stock of National Machinery. Citicorp Venture Capital purchased 70 percent of the common stock of the holding company for $9 million, the suit states.
The lawsuit alleges that Citicorps Venture Capital officials, "sometime in late 2000 ... determined that their $9 million investment (in the holding company) would not likely achieve the substantial returns that were expected of their investments ..." and that they "calculated that they might achieve a greater return on their equity investment in (the holding company) if National Machinery Co. failed completely, rather than simply muddled along."
The allegations continued that Citicorps Venture Capital officials reasoned that complete failure of National Machinery would give them "an opportunity to restructure and improve the terms of their equity investment in (the holding company) by squeezing-out minority stockholders, including the Kalnow family, and discharging large amounts of National Machinery's indebtedness."
It goes on to blame the defendants for "purposely and recklessly" acting to cause National's insolvency.
The suit claims information was withheld from Andrew Kalnow, who represented the Kalnow family on National's board of directors, about the financial health of the company.
Citicorp is also accused of "permitting the waste of the assets of (National)," the suit reads.
Kalnow, according to the suit, was close to completing a deal to buy the company back on Jan, 11, but Citicorp informed the creditor banks &emdash; referred to as "senior lenders" in the lawsuit &emdash; that Kalnow would not be able to see the proposal through because he didn't have a majority of votes on the board and that Citicorp made an offer to buy the liens against the company from the banks.
"... the Senior Lenders had no choice but to accept CVC's offer or risk a loss of what little remained of the Senior Lenders' collateral," the suit reads.
The suit alleges that Citicorp bought the claims being held by the banks for less than $20 million &emdash; $17 million less than what was owed. National was worth $98 million in 1998, according to the suit.
"On information and belief, but for the shut down of (National) and the severe deterioration of its business caused by the intentional and reckless actions and inactions of the defendants, the Senior Lenders would have never sold their secured claims to the CVC Entities for less than $20 million
Four counts of misconduct are named in the suit.
The first and second count claims that information about National's financial health was withheld. The third count alleges that such actions were "fraud and fraudulent concealment" and the fourth claims that such actions interfered with possible economic gain the Kalnows might have had with the company.
All four counts ask for judgment, "for such amounts that will be proven at the trial of this matter..." but do not state specific dollar amounts.
Judge Steve C. Shuff will preside over the case and no dates have been set.