*

Honorable Richard H. Mills, U.S. District Judge for the

Central District of Illinois, sitting by designation. 

United States Court of Appeals,

Eleventh Circuit.

No. 94-9216.

Matter of MUNFORD, INC., d.b.a. Majik Market, Debtor.

Danné Brokaw MUNFORD, as Executrix of the Estate of Dillard

Munford; Russell C. Fellows; Winton M. Blount; Herbert J.

Dickson; James L. Ferguson; Robert M. Gardiner; Richard K.

Leblond, II; Andrall E. Pearson; S.B. Rymer, Jr., PlaintiffsAppellants,

James M. Carroll; Joseph W. Hardin; Jay Rubel; Shearson Lehman

Brothers, Inc.; DFA Investment Dimensions Group, Inc.; State

Street Bank & Trust Company; PNC Bank, National Association,

Plaintiffs,

Shearson Lehman Brothers, Inc., Plaintiff,

v.

VALUATION RESEARCH CORPORATION, Defendant,

Munford, Inc., Defendant-Appellee.

Oct. 10, 1996.

Appeal from the United States District Court for the Northern

District of Georgia. (No. 1:94-00348-CV-GET), G. Ernest Tidwell,

Chief Judge.

Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and

MILLS*

, District Judge.

HATCHETT, Chief Judge:

In this corporate leveraged-buy-out merger case, we affirm the

district court's ruling that Georgia's stock distribution and

repurchase statutes apply.

FACTS

In May 1988, the Panfida Group offered to purchase Munford,

Inc., a public company on the New York Stock Exchange, through a
leverage buy out (LBO) structured as a reverse triangle merger for

$18 per share. Under the terms of the proposed merger agreement,

the Panfida Group agreed to create Alabama Acquisition Corporation

(AAC) and a subsidiary, Alabama Merger Corporation (AMC), and

through AAC or AMC deposit the funds necessary to purchase Munford,

Inc.'s outstanding stock with Citizens & Southern Trust Company.

As evidence of its commitment to purchase Munford, Inc., the

Panfida Group bought 291,100 of Munford, Inc.'s stock. In June

1988, the Panfida Group also told Munford, Inc.'s board of

directors that it, upon the sale of Munford, Inc., intended to put

additional capital into Munford, Inc. but would only invest as much

as Citibank required to finance the proposed merger.

After consulting its lawyers and financial experts at Shearson

Lehman Brothers (Shearson), the board of directors accepted the

Panfida Group's offer pending shareholder approval of the purchase

agreement. Prior to the directors seeking shareholder approval,

the Panfida Group learned that Munford, Inc. had potential

environmental liability. Consequently, the Panfida Group reduced

the purchase price from $18.50 a share to $17 a share. On October

18, 1988, the shareholders approved the merger plan. On November

29, 1988, the sale of Munford, Inc. to the Panfida Group closed.

Pursuant to the purchase agreement, the LBO transaction converted

each share of common stock into the right to receive the merger

price of $17 per share and extinguished the shareholders' ownership

in Munford, Inc. On January 2, 1990, thirteen months after the

merger, Munford, Inc. filed for Chapter 11 proceedings in

bankruptcy court.
PROCEDURAL HISTORY

On June 17, 1991, Munford, Inc. brought an adversary

proceeding in bankruptcy court in the Northern District of Georgia

on behalf of itself and unsecured creditors pursuant to 11 U.S.C.

§§ 544(b) and 1107(a) (1988), seeking to avoid transfers of

property, disallow claims and recover damages against former

shareholders, officers, directors, and Shearson. In Count III of

its complaint, Munford, Inc. asserted that the directors violated

legal restrictions under Georgia's distribution and share

repurchase statutes in approving the LBO merger. Specifically,

Munford, Inc. asserts that the LBO transaction constituted a

distribution of corporate assets that rendered Munford, Inc.

insolvent. The directors moved for summary judgment contending

that the Georgia distribution and repurchase statutes did not apply

to LBO mergers. On August 10, 1994, the district court, adopting

the bankruptcy court's report and recommendation in part, denied

the directors' motion for summary judgment on Munford, Inc.'s stock

repurchase and distribution claim, ruling that Georgia's stock

distributions and repurchase restrictions applied to LBO

transactions. The district court also found that a genuine issue

of material fact existed as to whether the LBO merger rendered

Munford, Inc. insolvent in violation of Georgia law. On August 26,

1994, the district court amended its order and entered final

judgment pursuant to Federal Rules of Civil Procedure 54(b) to

permit this appeal. Fed.R.Civ.P. 54(b).

CONTENTIONS

The directors contend that the district court erred in
concluding that the LBO merger constituted a distribution of assets

within the meaning of Georgia's distribution and repurchase

statutes. They contend that these statutes do not apply to an

arm's-length sale of a company to a third party through an LBO

merger. In the alternative, the directors contend that they should

not face personal liability for alleged violations of Georgia's

distribution and repurchase statutes because they approved the LBO

merger in good faith with the advice of legal counsel.

Munford, Inc. contends that the district court properly denied

the directors' motion for summary judgment on this claim.

ISSUE

The sole issue on appeal is whether the district court erred

in ruling that Georgia's stock distribution and repurchase statutes

apply to a leverage acquisition of a corporation.

DISCUSSION

 We review the denial of summary judgment de novo applying the

same legal standard that controlled the district court in rendering

its decision. Brown v. Crawford, 906 F.2d 667, 669 (11th

Cir.1990), cert. denied, 500 U.S. 933, 111 S.Ct. 2056, 114 L.Ed.2d

461 (1991).

 Georgia's capital surplus distribution statute provides, in

pertinent part:

(a) The board of directors of a corporation may from time to

time distribute to shareholders out of capital surplus of the

corporation a portion of its assets in cash or property

subject to the following [provision]:

(1) No such distribution shall be made at a time when the

corporation is insolvent or when such distribution would

render the corporation insolvent[.]

O.C.G.A. § 14-2-91 (1988). Similarly, Georgia's stock repurchasing
 1

On July 1, 1989, O.C.G.A. § 14-2-640 superseded O.C.G.A. §§

14-2-91 and 14-2-92(e). 

statute prohibits directors of a corporation from repurchasing the

corporation's shares when such purchase would render the

corporation insolvent. O.C.G.A. § 14-2-92(e) (1982).1

 Under both

statutes, directors who vote for or assent to a corporate

distribution or stock repurchase in violation of these statutes are

jointly and severally liable for the amount distributed or paid to

the extent the payments violated the restrictions. O.C.G.A. § 14-

2-154(a)(1), (2) (1982).

The directors appeal the district court's denial of summary

judgment contending that Georgia's distribution and share

repurchase statutes do not apply to LBO mergers. The directors

argue that Georgia's distribution and repurchase statutes only

apply in circumstances where the directors take assets of the

corporation and either distribute them to shareholders or use them

to repurchase shares. In both cases, the directors assert, control

of the company does not change hands and the directors determine

the source of the assets used. The directors note that in this

case the Panfida Group owned Munford, Inc. at the completion of the

LBO merger and thereafter ran the company. The directors therefore

argue that only Georgia's merger statutes apply to this

transaction.

The district court denied the directors' motion for summary

judgment adopting the reasoning of the bankruptcy court. The

bankruptcy court, in analyzing the LBO merger, considered the

substance of the transaction and equated the LBO merger to a stock
distribution or repurchase, disregarding the fact that Munford,

Inc. had new owners and stockholders as a result of the merger at

the time the shareholders received the LBO payments. The

bankruptcy court specifically found that: (1) the directors

"approved or assented to the underlying [m]erger [a]greement which

structured and required payment to the shareholders"; (2) the

merger agreement contemplated the Panfida Group's pledging of

"virtually all of Munford[, Inc.]'s assets as collateral" for the

loan that funded the LBO payments made to the shareholders; and

(3) the directors knew or should have known "the source, purpose,

or use of" Munford, Inc.'s assets prior to or at the time the

directors approved the merger plan. Based on these findings, the

bankruptcy court concluded that a reasonable jury could conclude

that the merger rendered Munford, Inc. insolvent in violation of

Georgia's distribution and stock repurchase statutes.

In reaching its conclusion, the bankruptcy court rejected a

Fourth Circuit case that refused to apply Virginia's corporate

distribution statute to recapture payments made to shareholders

pursuant to an LBO merger. See C-T of Virginia, Inc. v. Barrett,

958 F.2d 606 (4th Cir.1992).

In C-T of Virginia, the Fourth Circuit held that the LBO

merger did not constitute a distribution within the meaning of

Virginia's share repurchase and distribution statutes reasoning

that Virginia's distribution statute

[was] not intended to obstruct an arm's-length acquisition of

an enterprise by new owners who have their own plans for

commercial success. The reason for this distinction is

simple: a corporate acquisition, structured as a merger, is

simply a different animal from a distribution.
C-T of Virginia, 958 F.2d at 611. The court in C-T of Virginia

further reasoned that because such distribution statutes derive

from the regulation of corporate dividends courts should limit

their restriction to situations in which shareholders after

receiving the transfer from the corporation retain their status as

owners of the corporation.

The bankruptcy court, in this case, rejected this line of

reasoning, reasoning that the legislature enacted the distribution

and share repurchase statutes of the Georgia Code to protect

creditors "by prohibiting transfers at a time when a corporation is

insolvent or would be rendered insolvent." Such intent, the

bankruptcy court noted, "furthers the longstanding principle that

creditors are to be paid before shareholders." We agree with the

district court and the reasoning of the bankruptcy court and

decline to join the Fourth Circuit in holding that "[a] corporate

acquisition, structured as a merger, is simply a different animal

from a distribution." C-T of Virginia, Inc., 958 F.2d at 611.

We note that the LBO transaction in this case did not merge

two separate operating companies into one combined entity.

Instead, the LBO transaction represented a "paper merger' of

Munford, Inc. and AMC, a shell corporation with very little assets

of its own. To hold that Georgia's distribution and repurchase

statutes did not apply to LBO mergers such as this, while nothing

in these statutes precludes such a result, would frustrate the

restrictions imposed upon directors who authorize a corporation to

distribute its assets or to repurchase shares from stockholders

when such transactions would render the corporation insolvent. We
therefore affirm the district court's ruling that Georgia's

restrictions on distribution and stock repurchase apply to LBO.

 In the alternative, the directors argue that their approval

of the LBO merger should not subject them to liability under the

distribution and repurchase statutes because they approved the

merger in good faith and with the advice of legal counsel. Because

we are not aware of any Georgia courts that recognize good faith or

reasonable reliance on legal counsel's advice as an affirmative

defense to liability under Georgia's distribution and repurchase

statutes, we reject this argument.

CONCLUSION

For the reasons stated above, we affirm the district court's

denial of the directors' motion for summary judgment on Munford,

Inc.'s stock distribution and repurchase claim.

AFFIRMED.