Bankruptcy Judge Rules Against CIT In Tyco Dispute

Date : 12/22/2011 @ 4:16PM
Source : Dow Jones News
Stock : Cit Grp. (Del) (CIT)
Quote : 47.27  0.0 (0.00%) @ 4:00AM

Bankruptcy Judge Rules Against CIT In Tyco Dispute

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A bankruptcy judge has ruled against commercial lender CIT Group Inc. (CIT) in a tax dispute with former parent Tyco International Ltd. (TYC).

Judge Allan L. Gropper issued an opinion Wednesday denying CIT's motion for summary judgment in the matter, ruling the lender can't subordinate an unsecured claim that Tyco filed as part of CIT's 2009 bankruptcy. The claim related to a tax agreement the companies entered when Tyco spun off CIT in 2002.

CIT is reviewing the ruling and "considering our options with respect to an appeal of the decision," a spokesman for the lender wrote in an email Thursday.

Tyco didn't immediately respond to requests for comment.

Under the tax agreement, CIT was to pay Tyco for any savings the lender gained under "tax attributes" Tyco created while it owned CIT, according to the lender's regulatory filings

CIT filed for Chapter 11 bankruptcy in November 2009 as it struggled under a heavy debt load and a souring economy. As part of the bankruptcy, CIT rejected the tax agreement with Tyco, which later filed a claim for damages stemming from that move.

Through arbitration proceedings, Tyco has alleged CIT is liable for about $90 million in damages from the tax benefits it allegedly used and at least $100 million in damages from breaching other provisions of the agreement, according to Gropper's opinion.

After a failed effort to resolve the issue, CIT filed an adversary action in June against Tyco in U.S. Bankruptcy Court for the Southern District of New York. Both CIT and Tyco filed motions for summary judgment in the proceeding.

CIT argued Tyco shouldn't be able to recover any part of its claim because the tax agreement was formed in connection with CIT's initial public offering that resulted from its spinoff from Tyco. As such, the agreement was tantamount to an equity investment, CIT argued. Equity shareholders are typically wiped out when a company files for bankruptcy.

"Tyco now attempts to elevate its claim for damages from the sale of the CIT shares by dressing up the residual piece of its equity investment in the guise of a separate agreement," CIT said in the adversary suit against Tyco.

But Gropper disagreed with CIT's argument.

While "there is no question that the Tax Agreement has a nexus to the issuance of the stock in the IPO in that both were agreed to in connection" with CIT's spinoff, "the real question is whether" Tyco "bargained for the risks and rewards of a holder of equity rather than a holder of debt," Gropper wrote.

"It is clear that Tyco contracted for the status of a creditor and not a holder of equity," Gropper added.

CIT, led by former Merrill Lynch chief executive John Thain since 2010, specializes in lending to small and midsize businesses. It has been trying to restructure high-cost debt and fund more of its loans through low-cost deposits since emerging from bankruptcy.

CIT's shares were up 1.9% at $36.21 in recent trading on a day of broader market gains. Tyco's shares were down 5 cents at $46.26.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; andrew.r.johnson@dowjones.com

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