BofA Appeals Denial of Injunction Bid Against Morphing Hedge Fund

Bank of America wants to immediately appeal a Delaware judge's denial of its bid to stop New York hedge fund Steel Partners II from reorganizing into a public corporation with shares trading on a stock exchange.

The bank filed the request for an interlocutory appeal to the state Supreme Court after Chancellor William Chandler denied its motion for a preliminary injunction to stop a restructuring that will convert Steel Partners from a limited partnership to a corporation with public shareholders.

In a limited partnership the rights and obligations of investors, managers and general partners are generally limited to what is spelled out in a contract rather than corporate law. The size of investments are measured in units rather shares.

Steel Partners is chartered in Delaware, so disputes involving governance issues are normally decided there.

BofA is acting as trustee of ACF Master Trust, a benefit plan for employees of ACF Industries, a railcar maker owned by billionaire financier and corporate raider Carl Icahn.

In effect, the suit pits Icahn against another activist financier, Warren Lichtenstein, who is known to shake up corporate boardrooms through his hedge fund firm, Steel Partners LLC, the parent of Steel Partners II.

The ACF trust is demanding the return $15 million it says it invested in the Steel Partners II (Offshore) Ltd. fund in 2005.

According to the complaint, the fund lost more than 40 percent of its value last year. Numerous investors, including ACF, then asked to redeem their interests, demanding cash or the equivalent in fund assets.

Steel Partners II instead allegedly suspended redemptions, locking up the investors' money as part of a plan to turn the firm into a public company with shares trading on a stock exchange.

At a June 19 hearing on the motion for a preliminary injunction, BofA sought to impose a liquidating trust that would stop the conversion of ACF's investment into shares that it said would be difficult to sell.

Steel Partners II accused BofA and Icahn of trying to "frustrate the choice made by more than 56 percent of the investors in Steel Partners" to either participate in the reorganization or to exit with a distribution equal to the current value of their investment.

A liquidating trust is not authorized by the hedge fund contract or by Delaware law, Steel Partners II contends.

In a brief in opposition to the preliminary injunction motion, Steel Partners II said the plaintiffs fail to show how they will suffer irreparable harm.

"Plaintiffs' complaint about the loss of value that would result from distributing securities to redeeming investors ... rings hollow," the defendant argued. "Nothing in the fund documents ever assured redeeming investors the right to obtain an alleged value from a liquidation of all assets."

In a one-page order issued after the hearing Chancellor Chandler denied the request for an injunction.

BofA then asked the Chancery Court for permission to appeal that issue to the Delaware Supreme Court immediately, rather than wait until the rest of the case is decided.

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Bank of America is represented by Stephen E. Jenkins and Richard D. Heins of Ashby & Geddes in Wilmington, Del.The defendants are represented by Bruce Silverstein, James Hughes Jr., Martin Lessner, John Paschetto, Christian Wright, Dawn Jones, Kathaleen McCormick, Evangelos Kostoulas and Emily Burton of Young Conaway Stargatt & Taylor in Wilmington; Thomas Fleming and Christine Wong of Olshan Grundman Frome Rosenzweig & Wolosky in New York; and Howard Kaplan of Arkin Kaplan Rice LLP in New York.