Opinion ID: 597807
Heading Depth: 2
Heading Rank: 1

Heading: The Investment in and Bankruptcy of Express

Text: 5 In December 1984, the Fugazy companies were in dire need of capital, and William asked his then-friend Kluge to consider having Metromedia purchase an interest in one or more of them. In January 1985, Kluge asked Subotnick to sign a letter of intent expressing an interest in purchasing Express, a radio-dispatched car business. After signing such a letter, Subotnick and his staff began to explore the financial viability of Express, and conducted, inter alia, an audit, a market analysis, and a due diligence investigation. 6 Subotnick returned to Kluge with a report that, though optimistic about Express, advised against the acquisition because Subotnick believed this was not the kind of business we should be in. Kluge responded by having Subotnick inform William that Metromedia would not purchase Express. William urged Kluge to reconsider, however, and after additional analysis Subotnick and his staff concluded that Express was a potentially sound acquisition that could be made profitable with expanded operations and improved management. 7 As a result, on March 21, 1985, Metromedia and appellants entered into a Stock Purchase Agreement (Agreement) pursuant to which Metromedia acquired newly issued common stock representing an 80% interest in Express. In exchange, Metromedia agreed principally to (1) pay $2,000,000 cash to Express or others on Express's behalf, (2) make a $4,000,000 subordinated loan to Express, (3) guarantee up to $3,000,000 in promotional advances from an automobile company to Express, and (4) cure any default on a loan previously made by Citibank, N.A., to William (Citibank loan) in the original principal amount of $3,500,000. As discussed in greater detail below, the Agreement contained a section entitled Representations and Warranties of Express and the Stockholders with respect to, inter alia, Express's outstanding contracts, its exposure to pending or threatened litigation, and its financial condition. 8 In July 1986, Express filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (1988). In March 1987, the proceeding was converted into one under Chapter 7 for liquidation, 11 U.S.C. § 701 et seq. (1988). In the course of the bankruptcy proceeding, Metromedia discovered that in or about January 1987, William had transferred one of Express's assets, to wit, a Federal Communications Commission (FCC or Commission) license and two radio frequencies (collectively License), to Fugazy Limousine Limited (Limousine), a company owned by William's son, defendant Roy D. Fugazy (Roy or Roy Fugazy). William had transferred the asset without notice to or permission from the bankruptcy court, and without consideration. Limousine had then obtained approval of the transfer from the FCC by failing to inform the FCC that Express was in bankruptcy. Eventually, in a Memorandum Decision dated May 14, 1990, and filed on May 15 (Bankruptcy Court Decision), the bankruptcy court ruled that William had improperly transferred the license in direct, willful contravention of the automatic stay imposed at the commencement of the bankruptcy proceeding, see 11 U.S.C. § 362 (1988), and it ordered, inter alia, that William pay attorneys' fees to the bankruptcy trustee. Matter of Fugazy Express, Inc., 114 B.R. 865 (Bankr.S.D.N.Y.1990), aff'd, 124 B.R. 426 (S.D.N.Y.1991), appeal dismissed for lack of jurisdiction, 982 F.2d 769 (2d Cir.1992).