## Facts

- Wieboldt Stores, Inc., a Chicago department-store chain, experienced financial distress and was taken private through a leveraged buyout (LBO) organized by insider shareholders using WSI Acquisition Corporation.
- The LBO was financed through coordinated lending that resulted in liens on substantially all of Wieboldt’s assets.
- As part of the transaction, key assets were sold and/or pledged, and loan proceeds were used to fund a tender offer paying $13.50 per share to shareholders who tendered their stock.
- The complaint alleged that Wieboldt was insolvent at the time of the tender offer or was rendered insolvent or inadequately capitalized by the LBO, leaving it unable to meet obligations to unsecured creditors.
- Wieboldt later filed for Chapter 11 and, acting in its own name and on behalf of its Official Committee of Unsecured Creditors, sued insiders, lenders, transaction participants, and tendering shareholders.
- The suit asserted fraudulent conveyance claims under the Bankruptcy Code and Illinois law, along with claims under the Illinois Business Corporation Act based on alleged unlawful distributions and related misconduct.
- Numerous defendants moved to dismiss, challenging pleading sufficiency, standing (including representative/derivative capacity), and the viability of claims against tendering shareholders.

## Issues

1. Whether the complaint adequately stated fraudulent conveyance claims challenging an LBO’s asset sales, liens, and payments to cashed-out shareholders under federal bankruptcy and Illinois fraudulent conveyance law.
2. Whether the debtor (and estate-related representatives) could pursue the claims in a representative posture on behalf of unsecured creditors.
3. Whether shareholders who tendered stock for cash in the LBO could be treated as transferees/beneficiaries subject to avoidance and recovery.
4. Whether claims under the Illinois Business Corporation Act based on allegedly unlawful shareholder distributions and related director/officer conduct were sufficiently pleaded and cognizable.

## Decision

- The court largely denied the motions to dismiss and permitted the principal fraudulent conveyance theories to proceed.
- The court held the complaint sufficiently alleged lack of reasonably equivalent value and insolvency or unreasonably small capital as a result of the LBO.
- The court permitted the action to proceed in a representative posture tied to recovery for the benefit of the estate and unsecured creditors.
- The court rejected a categorical shield for tendering shareholders and allowed claims to proceed on the theory they may be liable as recipients of avoidable transfers.
- The court allowed many Illinois Business Corporation Act claims to proceed, while narrowing or dismissing certain specific counts or theories.

## Legal Principles

- An LBO may be attacked as a fraudulent transfer when the target incurs secured debt and encumbers assets to fund payments that primarily benefit departing equity, and the transaction leaves the firm insolvent or with unreasonably small capital.
- “Reasonably equivalent value” focuses on what the debtor received in exchange for incurring obligations and granting liens, not merely on whether shareholders received fair price for their stock.
- At the pleading stage, well-pleaded allegations of insolvency, inadequate capitalization, and value shortfall are accepted as true; solvency and valuation are generally fact questions for later proceedings.
- Recipients of LBO consideration, including tendering shareholders, may be treated as transferees/beneficiaries for avoidance and recovery purposes when corporate assets and credit were used to fund the payout.
- Illinois corporate law may impose liability for authorizing shareholder distributions or transactions that are unlawful because the corporation is insolvent or would be rendered insolvent.

## Conclusion

The court held that detailed allegations that an LBO encumbered substantially all corporate assets to cash out shareholders while leaving the company insolvent or undercapitalized stated actionable fraudulent transfer and related Illinois corporate-law claims, and it allowed the case to proceed against insiders, lenders, and tendering shareholders subject to later proof.


Wieboldt Stores, Inc. v. Schottenstein, 94 B.R. 488 (N.D. Ill. 1988)