Opinion ID: 781162
Heading Depth: 2
Heading Rank: 1

Heading: Events Leading Up to the District Court Proceedings

Text: 5 Before it ceased operations, Color Tile was a Delaware corporation, headquartered in Fort Worth, Texas, that was a large specialty retailer of floor covering products. Since approximately 1989, Color Tile was a portfolio company of the Investcorp Group, an affiliation of investment entities engaged in the business of acquiring control of companies by investing its own funds as well as the funds of its wealthy foreign investors. The Investcorp Group was a long-standing client of Coopers, which had performed the due diligence on Color Tile before Color Tile was acquired by the Investcorp Group and which had been retained as Color Tile's outside auditor after the Investcorp Group acquired Color Tile. 6 In 1993, the Investcorp Group attempted to make Color Tile a more attractive candidate for an initial public offering by arranging for Color Tile to acquire the assets of American Blind Factory (ABF), a privately-owned, family-run company headquartered in Michigan that sold blinds and wallpaper through direct response marketing and retail stores. Through a series of complicated M & A transactions, Color Tile (through a wholly-owned subsidiary) eventually acquired ABF's assets and certain of its liabilities in late 1993/early 1994. The total cost of the Transaction to Color Tile was approximately $104 million. To finance the Transaction, the Investcorp Group arranged for Color Tile to raise $200 million in a public high-interest bond offering. The proceeds from this offering were used to pay the purchase price and transaction costs of the Transaction and to retire certain preexisting Color Tile bank debt that its lenders required Color Tile to pay down before they would consent to the Transaction. 1 7 Coopers performed certain consulting services for Color Tile in connection with the Transaction and the high-interest bond offering, the most significant of which were reviewing ABF's financial condition, performing due diligence on ABF, and analyzing how Color Tile would financially perform after acquiring ABF's assets. Color Tile Committee alleges that, as a result of these activities, Coopers learned that the financial projections used by the Investcorp Group to substantiate the Transaction were unrealistic and that, because these financial projections bore no resemblance to the actual performance of the two companies, there was a significant risk that Color Tile would be unable to meet its financial obligations as they came due and to operate its business in a competitive fashion after the Transaction closed. (This alleged knowledge on the part of Coopers is referred to as the Negative Conclusions in the various complaints subsequently filed by Color Tile Committee.) Coopers allegedly failed to share these Negative Conclusions with the five-member Color Tile Board of Directors, three of whom were members of Color Tile's management (Management Directors) and two of whom were affiliated with the Investcorp Group (Investcorp Group Directors). 8 The Investcorp Group's optimistic financial projections about the Color Tile-ABF combined operations never came to pass, and Color Tile began to experience difficulties servicing its new debt. In or about December 1995, Color Tile defaulted on a $10.4 million interest payment due on its high-interest bonds, and the following month it filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. In September of 1997, a global settlement was reached between Color Tile's bankruptcy estate and its various creditors, pursuant to which an assignment was made to Color Tile Committee 2 authorizing it to prosecute certain claims on behalf of the bankruptcy estate.