Merit creditor group sues for return of Five Star stock purchase price

By Caroline Salls

Pittsburgh, Dec. 14 - The TMG Liquidation Co., formerly Merit Group, official committee of unsecured creditors filed a lawsuit Wednesday against National Patent Development Corp. to avoid the Merit Group, Inc.'s allegedly fraudulent transfers in exchange for the stock of Five Star Group, Inc., according to a filing with the U.S. Bankruptcy Court for the District of South Carolina.

The committee has also named Jay Baker, Caleb C. Fort and E. Fort Wolfe Jr. as defendants for alleged breach of their fiduciary duties "for actions taken, and omissions," in connection with the Five Star acquisition.

National Patent owned 100% of the stock of Five Star before the stock was sold to the Merit Group, Inc. in January 2010.

Baker was Merit's chief executive officer and president, and Fort and Wolfe are members of Merit's board of directors.

According to the committee's complaint, Merit's offer of $33.12 million for the Five Star stock was based on projected cost savings and revenue enhancements resulting from the integration of Five Star into Merit's group of companies, "despite the weak economic climate and terrible industry conditions."

"The proposed price clearly was well above the market value of the Five Star stock," the committee said in the lawsuit.

In addition, the committee said Merit's board failed to hire an outside professional to advise them of the fairness of the proposed purchase price.

The committee said Merit was insolvent immediately before the Five Star Acquisition, and "the acquisition deepened Merit's insolvency as a result of purchasing stock that had a value far less than the purchase price."

"After Merit acquired Five Star, Merit failed to achieve the post-closing performances projected, spent far more than anticipated for the consolidation of warehouses and the integration of the companies, and suffered very substantial losses," the committee said in the complaint.

"These events and circumstances drained the debtors of their limited financial resources, and resulted in the debtors filing for bankruptcy relief."

The committee is looking to recover the purchase price to benefit TMG Liquidation's estates, according to the lawsuit. The creditor group is also seeking a judgment of at least $50 million against Baker, Fort and Wolfe.

Merit is a Spartanburg, S.C., paint sundry distributor. It filed for bankruptcy on May 17, 2011. The Chapter 11 case number is 11-03216.

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